Every 10-day increase in inventory translates into higher interest costs, which can erode margins by nearly 2 percent | File image
In a bid to mitigate the alarming pile-up of unsold passenger vehicle (PV) inventory, the Federation of Automobile Dealers Associations (Fada) is all set to formally approach banks and non-banking financial companies (NBFCs) with requests to exercise caution while disbursing funds to dealers.
This comes after the dealers’ body wrote twice to the Society of Indian Automobile Manufacturers (SIAM), raising alarm over the build-up of inventories. Approaching banks is crucial as the association highlights that excess financing by banks and NBFCs and further build-up of stocks could lead to a downward spiral in dealers’ profitability.
In August, unsold inventory stood at 70-75 days and was valued at Rs 77,800 crore, causing financial stress to dealers across the country.
Manish Raj Singhania, Chairman, Fada, stressed the need for financial prudence within the automobile retail industry.
“We will write to all NBFCs and banks to ensure that funds are disbursed based on dealer stock levels and not over-funded, especially now that the festival season is approaching,” he said.
Singhania also urged that funds should not be disbursed without the consent of distributors, even when requested by original equipment manufacturers (OEMs), to avoid further stockpiling.
The association also highlighted how stretched inventory levels are eroding dealer profitability. Dealers typically operate on thin margins, averaging between 3% and 4%, and the burden of excess inventory, often financed through loans, is exacerbating their financial problems.
Every 10-day increase in inventory translates into higher interest costs, which can erode margins by nearly 2 percent.
“If two months of our margin goes towards paying interest, it becomes an unsustainable burden for dealers,” Singhania said.
While the upcoming festival season is expected to boost sales, it could also exacerbate the inventory problem if distributors stock up too much in anticipation of increased demand.
Fada fears that if stock levels are not corrected after the festival, dealers could face a serious liquidity crisis and be forced to resort to liquidation.
Fada’s concerns are due to the decline in retail sales of photovoltaic panels, which fell 4.53 percent year-on-year in August, with 309,053 units sold compared to 323,720 in August 2023. The decline has been attributed to weak consumer demand aggravated by excessive rainfall and an “alarming” surplus inventory. On a monthly basis, sales fell 3.46 percent.
Fada has warned that if there is a correction after the festival season, the situation is likely to worsen as dealers will face pressure from end-of-year sales and additional discounts, which could further strain already thin profit margins and jeopardise the financial viability of dealers across the country.
As Fada continues its efforts to address this critical issue, its outreach to banks and NBFCs seeks to prevent over-financing, stabilise stock levels and protect the financial health of dealers ahead of an uncertain market period.
First published: September 8, 2024 | 1:52 PM IS
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