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Informist, Wednesday, Sep 11, 2024

By Darshan Nakhwa

MUMBAI – Automobile manufacturers expect the inventory of passenger vehicles at dealerships to drop to an optimal level over the next few months on the back of strong retail demand during the festival season, Federation of Automobile Dealers Associations President C.S. Vigneshwar said today. Factors such as discounts, new launches, a pick-up in government and private spending, and above-normal rainfall are expected to drive retail demand.

Of the various automobile segments, while inventories of two-wheelers and commercial vehicles remain at acceptable levels, passenger vehicle stocks have touched alarming levels of 70-75 days, according to Vigneshwar. "Inventory pile-up is something which we have been talking with the manufacturers (about)... but the manufacturers tell us that this will be optimised in the next few months because of the (strong demand during) the festive season," he said.

"Our economic growth is quite strong. We also have a lot of new products coming, and all the banks and financial institutions are quite aggressive in terms of approaching the customers and giving loans. All these factors are going to help in vehicle (retail) sales going up," Vigneshwar said. "Hopefully, this will lead to optimisation of inventory. However, the manufacturers also need to correct."

Recently, Tata Motors cut prices of all its internal combustion engine models. Several other passenger vehicle manufacturers are offering discounts to boost demand during the festival season. This would be the first time the auto retail industry has had to deal with such steep discounts since the beginning of the COVID-19 period, when original equipment manufacturers reduced production. However, that may not necessarily bring inventory levels down immediately, several dealers said on the sidelines of the event.

Retail sales of automobiles slowed down in the first few months of 2024-25 (Apr-Mar) due to lower government spending during the general election, resulting in inventories with dealers rising. However, rather than respond to the situation, automakers continued to increase dispatches to dealers month-on-month, exacerbating the issue. The federation has now asked banks and non-banking finance companies to intervene and immediately control funding to dealers with excessive inventory.

The inventory pile-up comes with its own costs for automobile dealers. Dealerships typically get a margin of around 3.5% of the sale price. However, high working capital costs--in the form of interest--can eat significantly into this margin. Working capital loans taken by the dealers currently come with an interest cost of 0.9%. Therefore, to finance an inventory of a month, a dealership has to set apart around 0.9% of its monthly sales as cost of capital or interest. However, given that inventories have risen to about 2.3 months, interest costs have also increased to around 2% of the turnover.  End

Edited by Rajeev Pai

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