Auto Worries: Inventory Level of Two-wheelers, Commercial Vehicles Continues To Remain Very High
In line with the overall slowdown in the automobile industry, the inventory levels of vehicles in the two-wheelers (2Ws) and commercial vehicle (CVs) segment continue to remain at a very high level across the country during July 2019, says Federation of Automobile Dealers Associations (FADA). 
 
"Passenger vehicle (PV) inventory levels reduces further and comes closer to FADA’s proposed 21 days inventory. CV inventory continues to be at high levels. Very slight reduction seen in 2Ws inventory levels and they continue to remain at very high levels and a serious cause of concern for dealers," the Association says in a release.
 
 (Source: FADA)
 
During July this year, overall sales continue to be negative, with 2W registering a de-growth of 5%, PV by 11% and CV at 14%. 
 
Commenting on July performance, FADA president Ashish Harsharaj Kale said, “Consumer sentiment and overall demand continued to be quite weak across all segments and most geographies. Although some respite seen with growth in monthly numbers, mainly due to revival of the monsoon bringing some Positivity and also June having the second lowest volume base this calendar year after February. With June being a completely dry and rain deficient month, consumer sentiment was at its lowest and with July rains covering up a lot of the deficit, some confidence in consumer demand led to pending purchase conclusion in July. Despite these factors CV sales continued to be in the negative zone even on monthly basis."
 
According to FADA, original equipment manufacturers (OEMs) in the PV segment initiated necessary steps and helped dealers in reducing inventory thus "helping us to manage our profitability and viability in these challenging times."
 
"CV inventory continues to remain at high levels and unlike the slight uptick in sales seen in July for PV and 2W, commercial vehicle sales continued to be negative in double digit and gave little room to the dealers to reduce Inventory. With the current weakness in demand overall and especially in the CV space the current inventory is a worry for the dealers, especially looking at the transition to BS6 now being just six months away," it added.
 
FADA says 2W inventory during the month saw very slight reduction and continues to be at very high levels. It says, "The high levels of inventory in 2W segment has continued from the start of this current slowdown in September 2018 without respite in any month and is a very serious concern of our members and threatening the financial viability of many dealer members and therefore a cause of serious worry to FADA. We would once again urge and request all our 2W OEM’s to help regulate this inventory to regular levels of three weeks and help our members avoid the perils associated with high inventory."
 
According to the dealers' association, surplus liquidity in the system would hopefully lead to aggression in retail lending. It has suggested partial or temporary relief in goods and services tax (GST) to spur immediate demand and bring an attractive scrappage policy.
 
Commenting on the liquidity, the FADA chief says, “Liquidity currently seems to be surplus in the banking system and with the strong focus of the Reserve Bank of India (RBI) and the finance ministry, should continue to be so. The recent rate cut by the RBI is an indication of its policy of monetary easing and is a big positive. The need now is in transmission of the liquidity and rate cuts in lending at retail levels to spur growth, as banks and non-banking finance companies (NBFCs) still continue to tread with a cautious approach for obvious reasons.”
 
FADA also conducted an online survey among its members, in which majority of dealers have termed current sentiments and liquidity situation as 'bad'.
 
(Source: FADA)
 
FADA also shared data for vehicle registration during July 2019 from across the country. However, for CV registrations, it could gather data only from 833 regional transport offices (RTOs) out of 1,452 RTOs due to technical reasons. 
 
 
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    COMMENTS

    ANILKUMAR MEHTA

    1 month ago

    NOT GOOD FOR AUTO DEALERS.

    Fitch Downgrades Macrotech Developers (Lodha) to 'B-' on Weak Liquidity Management
    Fitch Ratings has downgraded India-based real-estate developer Macrotech Developers Ltd's (MDL) long-term issuer default rating (IDR) to 'B-' from 'B' due to the company's weak liquidity management. Fitch has also downgraded the rating on the erstwhile Lodha Developer's $325 million 12% senior unsecured bond due March 2020 to 'B-' with a recovery rating of 'RR4' from 'B'/'RR4'. Fitch has simultaneously placed its all ratings on Macrotech Developers on rating watch negative (RWN).
     
    The 12% senior secured bonds were issued by Lodha Developers International Ltd and guaranteed by MDL and certain subsidiaries. 
     
    Fitch Ratings says, "MDL, formerly known as Lodha Developers, has relied on funding from domestic non-bank financial institutions (NBFI), including housing-finance companies, which are now shying away from lending to the property sector. The company's refinancing options have therefore narrowed as the onshore funding squeeze is coinciding with the maturity of its $325 million bond.
     
    The company was founded by Mangalprabhat Lodha, a member of legislative assembly (MLA) from Mumbai and chief of Bharatiya Janata Party (BJP)'s city unit. Any rating below BBB- is junk or below investment grade and Lodha, the largest developer in Mumbai region has already been having a junk rating by foreign rating agencies. 
     
    MDL has Rs2,000 crore of onshore debt maturities in FY20, a construction loan of 290 million pounds (about Rs2600 crore) due 21 December 2020 for its project at 48 Carey Street in London, and the $325 million (around Rs2,300 crore) unsecured bond due 13 March 2020. 
     
    Fitch says it expects cash collected at 48 Carey Street over the next few months to be sufficient to meet MDL's 290 million pound loan. "MDL has shared details of a financing package from an existing offshore lender to repay the $325 million bond, and we expect this facility to be finalised in the next two to three months although execution risks remain. We expect FY20 onshore debt maturities to be mostly manageable as some domestic banks appear willing to lend to reputable property developers with good quality projects such as MDL," it added. 
     
    MDL owes 58% of its Rs5,000 crore in FY21 onshore debt maturities to NBFIs and housing-finance companies for which the ratings agency believes the company will have to seek alternative funding particularly if the ongoing liquidity crisis among NBFIs persists. It says, "We forecast a cash flow deficit of Rs3,700 crore in FY21, conservatively assuming that the company will be able to obtain bank financing to fund at least 50% of its construction costs. MDL says it is negotiating with an existing onshore lender for a term facility secured against completed inventory in onshore projects, which will help the company to meet a substantial part of the Rs3,700 crore cash flow deficit. The company is also in negotiations to sell two of its commercial properties valued at Rs1,700 crore in aggregate, which can help cover the balance. MDL also has a 517 million pound (about Rs4,700 crore) construction loan at its project at 1 Grosvenor Square in London due March 2021."
     
    According to Fitch Ratings, the change in the domestic funding environment will present the company with significant challenges in meeting its debt maturities of Rs1,600 crore in the remainder of the financial year ending March 2020 (FY20) and Rs5,000 crore in FY21, although it repaid debt of Rs9,000 crore in FY18 and Rs4,800 crore in FY19 when liquidity was easier. "The risks are mitigated by the appetite of some domestic banks and alternative financing providers such as private-equity (PE) funds that continue to lend to the company due to its strong market position, good quality projects, and large unencumbered land bank,"it added. 
     
    Fitch says, its RWN reflects near-term risk that MDL's ratings could be downgraded by more than one notch if the company is unable to refinance or repay the $325 million bond due March 2020. MDL had told the ratings agency that it was in advanced stages of negotiations to secure sufficient funds to repay the bond.
     
    If the company is able to complete the refinancing, Fitch says it would consider removing the RWN. 
     
    According to the ratings agency, MDL has very high exposure to NBFI debt. Borrowings from NBFIs accounted for 56% of MDL's outstanding domestic debt at FYE19, and 58% of domestic debt due FY21. "We believe MDL would find it challenging to repay a majority of its debt through project cash flows as we expect an onshore cash flow from operations (CFFO) deficit of Rs850 crore in FY21," it added.
     
    MDL had Rs1,030 crore of committed undrawn credit lines from banks as of 30 June 2019, and the company says it secured these facilities to fund construction costs around six to 12 months in advance. The banks' continued provision of term loans to fund the company's construction costs should help to partly cover its upcoming funding needs, Fitch feels. 
     
    It says, "We believe MDL would need to rely on alternative sources such as private equity (PE) funds, possibly at a higher cost and under tighter conditions such as higher collateral cover, to displace its reliance on NBFIs in meeting its debt repayments. The company may, to a lesser extent, also have to rely on proceeds from the planned sale of two domestic commercial assets. MDL says it is currently negotiating a long-term facility of Rs2,000 crore with an existing PE lender, which if successful would help mitigate the FY21 debt-repayment risk."
     
    MDL has 3,350 acres of unpledged land at Palava, near Kalyan in Maharashtra with an enterprise value of Rs33,400 crore, according to an independent valuation report, implying a price of Rs10 crore per acre. The company completed the sale of a parcel of the Palava land in December 2018 to Piramal and Ivanhoe Cambridge at a similar price per acre to that of the external valuation. 
     
    However, Fitch says, the tighter domestic liquidity for property developers raises the risk that the unpledged Palava land may yield a lower value should MDL be required to sell part of it to repay debt, or lenders may require higher collateral cover to compensate for increased valuation risk in light of the scarcity of available funds. 
     
    During FY19, Lodha sold a property worth Rs7,200 crore, which was 12% down compared with past year. "We believe the lower sales were driven by demand that was weaker than we had expected and the near-term effect of a lower goods and services tax on under-construction properties from FY20, leading to some customers postponing their purchases. We expect domestic pre-sales to rise to Rs7,600 crore in FY20 and Rs7,900 crore in FY21, supported by demand growth in the affordable segment amid a substantial housing deficit and government initiatives. Collections in FY19 were strong at Rs9,200 crore(FY18: Rs9,100 crore), but are likely to moderate on weak FY19 domestic pre-sales of Rs7,200 crore (FY18: Rs8,100)," the ratings agency says.
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    5th ILFS Progress Report: More Questions Than Answers
    Almost everything about the 5th progress report submitted by the new board of Infrastructure Leasing & Financial Services (IL&FS) raises more questions than it answers. For starters, there is not much progress that the report documents. The crucial information that has made news is all in the annexures which contain the RBI (Reserve Bank of India) inspection report for 2018-19 and a couple of key reports by Grant Thornton (GT) on IL&FS Securities, ILFS Financial Services (IFIN) and Ramesh Bawa’s conflict of interest. Details about the last two, as well as most of the sales details, are already in the public domain. 
     
    From all appearances, this ‘progress report’ has been hurriedly put together in response to the rap from the National Company Law Appellate Tribunal (NCLAT) on 8th August. It is also unclear why the fourth and the fifth report have been submitted together. The NCALT had been critical about the ‘slow’ resolution process and asked for a progress report to be submitted by 3rd September. Shouldn’t the current management have taken time to ensure a comprehensive filing before the NCALT? 
     
    Here are a few worrying omissions in the report. Sources close to developments had told me that the IL&FS board was optimistic about recovering Rs40,000 crore-Rs50,000 crore through the resolution process, as against its outstanding debt at Rs99,354 crore. However, institutional investors point out that the total of claims from creditors of all group companies submitted to GT may be another shocker.
     
    The progress report makes no disclosure of claims received so far and only reproduces advertisements asking creditors of select companies to file their claims. Surely 10 months is a long enough time to arrive at this number? 
     
    The extent of claims filed would indicate the challenges with regard to distribution of funds recovered and brings us to the issue of the urgent need for a financial sector resolution process that I had written about on 7th August.
     
    Further, the progress reports are completely silent on the three expensive advisory firms appointed on 22 October 2018 to formulate and execute a resolution plan.
     
    The board appointed Arpwood Capital and JM Financial as financial and transaction advisors; they would also undertake valuation and monetisation of assets. 
     
    Alvarez and Marsal, appointed as restructuring advisor, was charged with maintaining controls, managing liquidity, managing stakeholders and evolving a resolution plan. Interestingly, Alvarez and Marshal had already been brought on board by the dismissed IL&FS board to formulate a turn-around strategy.
     
    Creditors and investors find it curious that the IL&FS board makes no mention of any recommendations or submissions from any of the three advisors. Meanwhile, the appointment of legal advisors has already raised a storm, with Justice DK Jain finding issues with the submissions made, the conflict of interest issues with regard to Cyril Amarchand Mangaldas and the abrupt resignation of Shardul Amarchand Mangaldas after a ‘showdown’ with the deputy managing director, Bijay Kumar, over some inaccurate filings that were flagged by Justice DK Jain. 
     
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    COMMENTS

    Kochar Bipin

    1 month ago

    What is most concerning about the report is that no update has been provided on the progress in recovery of the over 15000 cr contractual dues from unscrupulous customers like Sivashankaran. The only public update here was provided by JV partner Gayatri Projects who have announced that their JV with IL&FS has finally won an arbitration award of over 900 cr.
    No update is provided on recovery from Noida on the breach of contract when the CAG report submitted to Supreme Court documents that the shortfall of recovery on this project is over 1900 cr as per contractual agreement with Noida.
    IL&FS board seems least interested in recovering the public money invested by PF and mutual funds from unscrupulous customers.

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