Domestic CV industry continues to recover steadily, approaching pre-Covid highs: ICRA

The domestic commercial vehicle (CV) industry is expected to grow by 7–10% in FY2024, following growth of 24-26% in FY2023, according to ICRA. This growth would be fueled by the government's ongoing focus on infrastructure development as well as the continued strength of underlying demand drivers like infrastructure and construction activity. ICRA has maintained a stable stance on this sector as a result.

The macroeconomic climate improved, replacement demand increased, and the underlying industries—such as steel, cement, mining, automobiles, and e-commerce—saw good traction in Q3 FY2023, demonstrating the growth tendencies. Wholesale dispatches reported a growth of 16% YoY. In addition, freight rates are holding steady, which supports the viability of fleet operators when combined with good freight availability. All three sub-segments, light commercial vehicles (LCV), buses, and medium and heavy commercial vehicles (M&HCV), kept growing in Q3 and the first nine months of FY2023.

Sruthi Thomas, Assistant Vice President & Sector Head - Corporate Ratings, ICRA Limited, "Sales in the domestic CV industry continue to be propelled by multiple tailwinds including replacement of ageing vehicles, pick-up in mining, infrastructure and construction activities, improvement in the overall macroeconomic environment and healthy fleet utilisation levels resulting in improved fleet operator viability. Furthermore, the continued thrust of the Government on infrastructure development, as evidenced in the increased capex outlay of Rs 10trillion in the Union Budget for 2023-24, would augur well for sustained growth, especially in the heavy truck segment over the near term.”

In Q3 FY2023, the M&HCV (Truck) segment reported a volume increase of a strong 77,291 units, or 28% YoY, marking the segment's ninth straight quarter of double-digit YoY growth. After rising by 25–30% in FY2023, ICRA predicts that the segment's volumes will continue to grow at a healthy rate of 8–10% in FY2024. This growth will be driven by replacement demand as well as demand from the steel, cement, and mining industries because of an increase in economic activity and spending on infrastructure. The segment's quarterly volumes have risen above pre-Covid levels, but they are still below the industry highs of nearly 1 lakh units, which were seen in Q4 FY2019.

The growth drivers for the LCV segment also remain largely favourable, especially due to the increased requirement for last-mile transportation from the e-commerce segment, while demand from the agricultural and allied sectors would remain dependent on the stability of rural cash flows. However, with the base effect catching up, the growth is expected to slow down to 4-6% in FY2024 from 15-17% in FY2023.

Since Q4 FY2021, when offices, schools, and other educational institutions reopened, there has been good growth in the passenger carrier segment. The quarterly volumes reported in each of the three-quarters of the current fiscal at 16,000–19,000 units have finally reverted to pre-Covid levels, although much lower than the industry highs of 28,000 units witnessed in Q4 FY2019. ICRA expects volume growth of 120–130% in FY2023, supported by the low base and the opening up of offices and educational institutes. Also, the recent Union Budget put a lot of emphasis on getting rid of older government vehicles. This is expected to drive replacement demand from SRTUs in FY2024, which will support growth of 12–15% overall.

 “With the growth trends in the CV sector expected to continue over the near term, we also expect an improvement in the financial performance of the CV OEMs, led by the benefit of operating leverage and the easing of commodity prices; accordingly, the aggregate operating profit margin of CV OEMs is expected to revive to 6-7% in FY2023 and improve further in the next fiscal year." This, in turn, will support the gradual improvement in their credit metrics as well.

"In terms of the investment outlay, while CV OEMs have limited plans for capacity expansion over the near term, investments in new product development, electric and other alternative fuel vehicles, tightening emission norms, etc., would continue,” Thomas added.