Passenger vehicles and two-wheeler dealers in the country are expected to see higher revenue growth and profitability in the next fiscal with a revival in demand driven by rural demand and an increasing preference for personal mobility, a report said on Thursday.

With 20-22 per cent revenue growth and 50-100 basis points (bps) improvement in operating margin expected for next fiscal, overall revenue and operating profits of automobile dealers are set to scale back to pre-COVID levels, rating agency Crisil said.

The revenues, which were significantly impacted in fiscal 2020 and 2021, will see a steep recovery due to improved demand for automobiles across segments, it added.

This, along with improved ancillary revenues, which is more profitable than vehicle sales, will support overall operating profitability for automobile dealers, and boost cash accruals, the report said.

"We are seeing a turnaround. PV and 2W dealers are expected to see revenue growth of 20-22 per cent and 15-17 per cent, respectively, in fiscal 2022. Healthy rural demand and an increasing preference for personal mobility will drive this growth," Crisil Ratings Director Gautam Shahi said.

Revenue growth for commercial vehicle (CV) dealers is expected at 35-40 per cent in fiscal 2022, supported by improving economic activity, increase in budget allocation for infrastructure and low base effect, he added.

Over the past 12 months, the cost of ownership of passenger vehicles (PVs) and two-wheelers (2Ws) has risen 8-10 per cent following a 15-17 per cent surge in fuel prices, price hikes by OEMs to BS-VI costs and costlier raw material, CRSIL said, adding while that affected sales, the nationwide lockdown also slammed the brakes on ancillary revenue.

Recovery in new vehicle sales and ancillary revenues (through service, spare parts and insurance at 10-12 per cent of revenue and around 25 per cent of operating profit) would also help restore operating profitability to pre-pandemic levels of 3-4 per cent for automobile dealers, it said.

With improving operating performance, credit ratio (ratio of the number of rating upgrades to downgrades) is expected to improve next fiscal, the rating agency said.

This is after two years of weak operating performance, which impacted the credit metrics of CRISIL Ratings' rated automobile dealers, it added.

It was evident in the credit ratio declining to 0.3 times for the sector for April 2020-January 2021, the lowest in the past five fiscals. Increased support from OEMs (original equipment manufacturers) and the moratorium availed by automotive dealers helped manage liquidity pressures, the report said.

"We expect cash accruals of Crisil Ratings' rated automotive dealers to improve next fiscal, supported by better sales and profitability, including due to lower carrying costs," Crisil Ratings Associate Director Sushant Sarode said.

Inventory levels are expected to stabilise at 3-4 weeks from almost 1.5 months seen earlier this year, obviating balance sheet pressures and stabilising credit profiles, he added.

Automotive dealers should benefit from continued OEM support and strong demand recovery post the lockdown, as the sustenance of recovery in demand across segments, normal monsoon and inventory level at dealers' end will remain monitorable, the agency said.