Automotive (auto) dealers will see revenue accelerate 8-10% this fiscal, driven by 5-7% increase in sales volume1, premiumisation and price hikes of 2-5% by original equipment manufacturers (OEMs).

That, along with steady operating profitability and moderate debt, will keep their credit profiles stable, a CRISIL Ratings analysis of ~150 auto dealers indicates.

Sales volume growth will normalise this fiscal from the 17.3% surge last fiscal, due to the high-base effect (especially in the commercial vehicle [CV] and passenger vehicle [PV] segments) as well as factors specific to different vehicle segments. Growth this fiscal will be in line with the pre-pandemic compound annual growth rate (CAGR) of ~7% between fiscals 2015 and 2019.

Says Mohit Makhija, Senior Director, CRISIL Ratings, ?Auto-dealers? overall sales volume will grow by 5 ? 7% driven by steady growth in all vehicle segments. PV sales will grow 6-8%, led by improved semiconductor supplies and healthy domestic demand, especially in the fast-growing utility vehicles segment. CV sales volume will grow a moderate 4-6%, supported by the government?s infrastructure push, increased budgetary outlay2 and steady replacement demand. Despite a low base, tepid rural demand and increased competition from their electric versions, two-wheeler sales will also grow moderately at 5-6%, supported by demand for executive and premium motorcycles.?

Retail auto registrations clocked modest growth of 3% in the first seven months of this fiscal (see table in annexure), but should pick up in the remaining five months on higher sales of PVs and two-wheelers during the festive season, and of CVs in the last quarter led by increase in mining and infrastructure activities.

OEMs have increased prices by 2-5% during the past few quarters (5-14% in fiscal 20233). This, along with the full-year impact of price hikes in the previous years, will also support revenue growth of auto dealers this fiscal. No further price hikes are anticipated in the near future due to easing input prices.

Premiumisation, too, will support revenue growth. The share of utility vehicles and premium4 motorcycles and scooters, in particular, is rising as consumers increasingly prefer value-added vehicles with premium safety features.

Operating profitability5 of auto dealers will remain stable at 3.5-4.0%, supported by moderate revenue growth and steady contribution (10-15%) of the more profitable ancillary sales (service, spare parts and insurance).

Says Snehil Shukla, Associate Director, CRISIL Ratings, ?Steady operating performance leading to healthy cash accrual, combined with moderate debt, will strengthen debt protection metrics of auto dealers this fiscal. Interest coverage6 is projected at 3.3-3.5 times compared with ~3.3 times last fiscal, while gearing7 is seen at ~1 time as on March 31, 2024, compared with 1.2 times a year earlier.?