Motown woes worsen as inventory rises up to 100 days

As automotive industry continues to struggle with a prolonged slowdown in sales, the increase in inventory level at the retail showrooms after a slight dip in December-January has begun to worry the retail showroom owners.

The situation is worst in the two-wheeler segment, where in certain geographies the inventory level has nearly doubled to almost 100 days.

The continued slowdown in sales across all the segments has forced the industry stakeholders to review their growth prediction to about 3% for the fiscal from around 8-10% made earlier during the year.

A Delhi-based retailer said there has been a substantial increase in operational costs in recent times due to various factors as well as increased working capital needs, and that too, in a tight liquidity environment. And prolonged maintenance of such high inventory and its additional costs is getting unsustainable.

“If a similar situation persists, it will get difficult to survive in the business,” the dealer said.

The average inventory level across the country in the passenger vehicles segment currently stands at 50-60 days. Similarly, it is 80-90 days for two-wheelers and 45-50 days for commercial vehicles, the retailers said.

Ideally, the manageable inventory level across segments is around 30 days.

The dealers are of the opinion that the pile up in inventory happened because the original equipment manufacturers (OEM) wrongly predicted that the slowdown during the last months of 2018 was a temporary phenomenon and sales were predicted to spike up in the new year. Though OEMs reduced the inventory levels during December-January, they raised it again in February. However, the sales continued to remain mild leading to accumulation of inventory at the showrooms.

According to Sridhar V, partner, Grant Thornton India LLP, while month-on-month wholesale movement shows a push from the OEMs to dealers assuming an uptake post interest rate reduction, the retail numbers have shown a decline and the challenges faced by the dealers. With elections, the situation is expected to continue with the current low sentiments.

“Discount and offers could be expected to bring down the inventory level,” said Sridhar, adding that lowering of interest rates, if passed on by financing institutions, can increase demand to some extent.

Ashish Kale, president of retailers’ body Federation of Automobile Dealers Associations (FADA), said, “After a month of spike in PV sales in January, which was largely due to year-end stock clearance getting extended and a few new launches which generated some excitement, the industry is once again witnessing downward trend as February turned out to be one of the slowest months for auto retails during his  financial year.”

Experts say the Indian auto industry is experiencing a prolonged slowdown as it has already seen six months of slowing sales and growth reversal and positive triggers in the near term appear few.

According to the executives across the OEMs, retailers and component makers, one of the primary reasons for the slowdown has been tightening of liquidity by non-banking financial institutions (NBFCs) following the defaults by Infrastructure Leasing & Financial Services Ltd.

The other prominent reasons include the rise in fuel prices (though they have softened in the past few months), rural distress due to lack of rains in certain regions of the country, severe floods in Kerala during August, new insurance laws leading to increase in costs and slowdown in certain industries leading to a dip in consumer sentiments.