Anushruti Singh
The Federation of Automobile Dealers Associations (FADA) has called upon banks and non-banking financial companies (NBFCs) to immediately control funding to auto dealers with excessive inventory levels. This urgent appeal comes in light of the August 2024 Auto Retail Report, which shows a modest year-over-year (YoY) growth of 2.88 per cent across the sector but highlights significant disparities in performance across various segments.
Auto retail market performance in August 2024
The latest FADA report reveals a mixed performance across the auto retail market:
- Two-Wheelers (2W): Despite a YoY growth of 6.28 per cent, there was a month-over-month (MoM) decline of 7.29 per cent. The decline is attributed to rain disruptions and market saturation.
- Passenger Vehicles (PV): This segment saw a YoY decline of 4.53 per cent and a MoM decline of 3.46 per cent.
- Commercial Vehicles (CV): There was a sharp decline in the CV segment, with an 8.5 per cent MoM drop and a 6.05 per cent YoY decline, mainly due to weather-related disruptions and weakened industrial demand.
The report also highlighted that India experienced 15.9 per cent excess rainfall in August, disrupting auto retail performance across several regions. This abnormal weather pattern has exacerbated the challenges faced by the auto retail sector, including cash flow constraints and high inventory levels.
Inventory and cash flow concerns
The FADA report underscores the urgent need for better inventory management across the auto retail sector. Currently, the passenger vehicle (PV) segment has inventory levels of 70-75 days, equivalent to approximately 7.8 lakh vehicles valued at ₹77,800 crore. Dealers are struggling with aggressive Original Equipment Manufacturer (OEM) dispatches, which have created cash flow challenges and reduced profitability.
FADA President, Manish Raj Singhania, expressed concern over the situation:
“Rather than responding to the situation, PV OEMs continue to increase dispatches to dealers on a MoM basis, further exacerbating the issue. FADA urgently calls upon all Banks and NBFCs to intervene and immediately control funding to dealers with excessive inventory.”
Challenges and strategic outlook
Dealers are under pressure to manage their cash flows amidst aggressive discounting practices and a weak market sentiment. FADA has urged both dealers and OEMs to recalibrate supply strategies to prevent an inventory crisis. The association warns that if the current trajectory of excessive stock push continues, it could lead to severe disruptions in the auto retail ecosystem.
Near-term outlook and festive season prospects
Despite these challenges, FADA remains cautiously optimistic about the upcoming festive season, which could offer some relief to the struggling sector:
- Positive factors: Festivals such as Ganesh Chaturthi, Onam, and Navratri are expected to boost consumer sentiment, particularly in urban areas. Moreover, favorable rainfall in some regions has improved agricultural prospects, which may boost rural sales post-monsoon.
- Negative factors: However, continued heavy rains forecasted by the Indian Meteorological Department (IMD) could damage crops, weakening rural purchasing power. The inauspicious Shraddh period in September is also expected to pause PV sales.
Call for strategic inventory management
FADA’s call for strategic inventory management and targeted marketing efforts comes at a critical time for the auto retail sector. With inventory levels at an all-time high and the market facing several headwinds, the association’s recommendations aim to stabilise the industry during a period of uncertainty.
As Singhania noted, “Strategic inventory management and targeted marketing efforts will be key to capitalising on the festive period while navigating these challenges effectively.”
The auto industry will need to adapt swiftly to these recommendations to ensure sustainable growth amid challenging conditions.
