ICRA: Favorable demand in select segments of auto, easing supply constraints

22 Apr 2022 , 10:13 AM

Automobile dealership industry has been witnessing several headwinds in the recent past including subdued demand for two-wheelers (2W), supply constraints impacting growth of passenger vehicle (PV) sales, and high base effect limiting the growth in tractors segment. To assess the on-ground sentiments of the automobile dealers and to understand the current demand and supply trends for various segments, ICRA has conducted a survey on 22 dealers of PVs, 2Ws, commercial vehicles (CVs), and tractors spread across rural, semi-urban and metro areas.

The survey indicated recovering demand in select segments. 80% of 2W dealer respondents indicated that demand remains weaker than last year. Extended work and education from home has impacted scooters demand, whereas undistributed rainfall affected demand for rural-centric motorcycles. However, retail demand for PVs remains healthy and demand for CVs has been improving after two years of downturn. 53% of the respondents indicated that demand in PV and CV segments is better compared to previous year.

The automobile industry has been grappling with supply constraints as semiconductor shortage has impacted vehicle production. The PV segment was affected the most as demand for PVs remained healthy and exceeded supply. However, semiconductor availability has been improving on a sequential basis over the past few months.

Around 41% of the survey respondents indicated that supply situation across the dealership segments has witnessed improvement in the recent months, while 27% reported that supply remained constrained.

Supply constraints have resulted in increased waiting periods and lower inventory levels at the dealerships. 92% of PV dealer respondents indicated that waiting periods have increased compared to the last year on account of supply constraints. While supply has been better in other auto segments, 40% of the 2W, CV, and tractor dealer respondents have also pointed out that waiting period increased compared to the last year.

Nevertheless, 60% reported that high waiting period has not resulted in increased cancellations. Around 2/3rd of both PV and CV dealers indicated that current inventory holding is less than a month (2-4 weeks). However, 80% of 2W dealer respondents reported that they have around 4-8 weeks of inventory. Due to low inventory levels, dealer discounts have also been minimal.

Nithya Debbadi, Assistant Vice President and Sector Head, ICRA, says “While dealership segments are witnessing varied headwinds, supply is improving on a sequential basis and demand has been improving in select segments. The stable financing environment also augurs well with improving demand. Lower inventory is expected to reduce working capital borrowings and accordingly interest costs for the dealers and support their net margins. Further, due to low inventory levels, dealer discounts have also been minimal, which has further supported earnings of dealerships. Given these supporting factors, ICRA’s outlook on the automobile dealerships is stable.”

Source: ICRA