Funding inventory a challenge for MSME auto dealers

CRISIL has studied the performance of 120 micro, small and medium enterprises (MSMEs) rated by it in the automobile dealership space, to understand their dependence on external funding in 2013-14 (financial year April 1 to March 31). The study indicates that these MSMEs are highly leveraged, as the nature of business requires stocking of vehicles (inventory), which in turn necessitates heavy reliance on financial institutions (FIs) to fund a substantial portion of their inventory funding requirements.

Inventory comprises about 45 per cent of their total assets and FIs contribute about 80 per cent of the inventory requirement through short-term financing. The rest is acquired on credit from original equipment manufacturers (OEMs). Therefore, prudent working capital management is vital not only for growth, but also for survival. Due to their high dependence on external borrowings to finance inventory, interest rate changes have a direct impact on the profitability of these MSMEs, thus affecting their credit profile.

As the auto-dealership industry is highly competitive and vulnerable to macro-economic factors such as inflation and interest rates, MSMEs with a wider selection of vehicles and customer-friendly services have a competitive edge over their peers.

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Note: The analysis is based on the latest audited financial statements of CRISIL-rated MSMEs. Most enterprises finalise their audited financials by the end of the second quarter, after the closure of the financial year. CRISIL rates over 50,000 MSMEs in India. This fortnightly tracker presents to our readers insights on MSMEs, a key element of the Indian economy.