There are all signs of acche din, albeit slowly, returning to the Indian commercial vehicle industry.
05 Mar 2015 | 3826 Views | By Autocar Professional Bureau
There are all signs of acche din, albeit slowly, returning to the Indian commercial vehicle industry. Thanks to an uptick in the economy and improved market sentiment, some segments of the domestic CV industry have shown signs of recovery in FY2015 after two years of a downturn.
As per ...
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There are all signs of acche din, albeit slowly, returning to the Indian commercial vehicle industry. Thanks to an uptick in the economy and improved market sentiment, some segments of the domestic CV industry have shown signs of recovery in FY2015 after two years of a downturn.
As per an ICRA Ratings CV industry study, in the first 10 months of the fiscal (April 2014-January 2015), the pace at which domestic CV sales have been declining has reduced to 4.6 percent compared to a contraction of 20.2 percent witnessed during FY 2014.
The critical Medium & Heavy Commercial Vehicle (M&HCV) truck segment has posted a positive growth of 19.0 percent in the 10-month FY 2015 period while the HCV (16T+) segment, which accounts for almost half of total M&HCV (truck) sales has been witnessing strong demand (up 42.6% in 10m FY 2015) on back of replacement demand (following two years of deferment) and capacity addition by organized fleet operators.
However, while the M&HCV truck segment seems to have bottomed out, the LCV truck segment is still experiencing sluggish trends (down 13.8% YoY) as significant capacity addition over the past few years and constrained financing environment amidst rising delinquencies remains a challenge for the segment. The bus segment, which contributes nearly 13 percent to industry sales, has also started witnessing an improvement from Q3 FY15 onwards after various State Road Transport Undertakings (SRTUs) started placing orders for new buses as part of the JNNURM II programme.
Improving fleet utilisation levels
For fleet operators, the operating environment over the past 6-9 months has also stabilised thanks to the sharp drop in diesel prices (from Rs 54.34 a litre to Rs 46.62) and relatively firm freight rates, implying improvement in their cash flows.
Feedback from a wide spectrum of fleet operators based in North and Western India indicates that fleet utilisation levels are gradually improving on back of higher load availability from some of the key freight generating sectors such as automobiles, cement and other general industries. While the overall environment seems to be improving, there are still pockets of challenges. For instance, the demand for tippers is likely to remain subdued in view of delays in pick-up in mining activities in the affected states and sizeable idle capacity. Secondly, the subdued trend in re-sale values of second-hand vehicles (apart from ageing of existing fleets) suggests that demand recovery is still in the initial stages.
With the recovery in CV sales and improving earnings, ICRA expects the credit profile of CV OEMs to also improve in the near to medium term on back of higher internal cash flow generation and relatively limited capital expenditure requirements.
The margins of CV players are likely to expand further in FY 2016 compared to the previous couple of years. The extent of improvement in margins would also been driven by increasing focus of OEMs to scale-up their exports volumes, which have grown by 14.7 percent in 10m FY 2015 (as against -3.7% in FY 2014). The extent of improvement is expected to remain sensitive by continuation of high discounts being offered by OEMs, likely increase in expenses related to new model launches, and inflationary pressures on account of rising manpower costs.
Competitive landscape
There is growing competition in both the HCV and LCV segments. While competition in the M&HCV space has come largely from foreign OEMs, in the LCV space, Mahindra & Mahindra and Force Motors have gained share on back of growing acceptability of pick-up trucks and the Traveler range of buses.
While competition from OEMs like VECV and BharatBenz is likely to be formidable, the strong brand equity of incumbents with fleet operators, well-established product portfolio and wide spread servicing network would continue to pose a challenge for new players in gaining meaningful market share especially in the HCV segment. However, in the LCV segment competitive intensity is likely to increase as 2-3 new players are expected to enter the segment over the near-to-medium term.
M&HCVs rev up, marginal growth for LCVs
ICRA says the M&HCV (Truck) segment is likely to register a growth of 12-14 percent in FY 2016 driven by continuing trend towards replacement of ageing fleets and expectations of a pick-up in demand from infrastructure and industrial sectors in view of the reforms being initiated by the government. Over the medium term, the demand for new CVs will also be driven by gradual acceptance of advance trucking platforms, progression to BS-V emission norms (possibly by 2017 onwards) and introduction of technologies such as Anti-Lock Braking System (ABS), which may lead to some advance purchases by fleet operators.
Unlike M&HCVs, the LCV segment is expected to grow at a modest pace (i.e. 4-6%) in FY 2016 as segment’s prospects continue to be influenced by overcapacity issues and constrained financing environment amidst rising delinquencies. Nevertheless, driven by certain structurally favorable factor, the segment’s growth prospects over the medium-term remain intact.
Some of the factors that are likely to support steady demand for LCVs going forward include further proliferation of the hub-and-spoke logistics model with the implementation of GST, relatively untapped potential in semi-urban and rural areas, and improving urbanization levels.