Moderate revenue growth expected for CV makers next fiscal: CRISIL

Commercial vehicle (CV) makers are anticipated to experience a moderation in revenue growth to 5-7% year-on-year in the upcoming fiscal year. This follows an estimated around 9% increase in revenue for the current fiscal year. The growth is expected to be driven primarily by price hikes, as volume growth is forecasted to be modest for medium and heavy CVs (M&HCVs) and flat for light CVs (LCVs).

The sustained operating margin at 10-11% for the next fiscal year is anticipated due to higher average realisations, particularly from M&HCVs, and stable commodity prices, especially steel, iron, and aluminum. A study by CRISIL Ratings, covering four major CV makers, suggests that this trend is likely to continue.

LCVs account for approximately 60% of the sector's volume, with M&HCVs constituting the rest, including buses. The demand for M&HCVs is closely linked to activity in key end-user sectors such as infrastructure, transportation, and replacement demand. Meanwhile, LCV demand is influenced by factors like last-mile connectivity and the performance of e-commerce players.

Anuj Sethi, Senior Director at CRISIL Ratings, stated “Revenue growth of CV makers will be driven by higher realisations next fiscal. We expect domestic revenue growth for M&HCVs to lower to 2-3% (around 5% this fiscal), and this too will largely be driven by demand for buses. The likelihood of brief slowdown in infrastructure spending owing to general elections and continuing high interest rates shall impact overall M&HCV growth. Demand for LCVs is seen subdued this fiscal due to high-base effect and moderation in spends by ecommerce players. A similar trend is expected next fiscal as well.”

Domestic sales, accounting for over 90% of total volume, are expected to approach the previous peak of ~10 lakh units seen in fiscal 2019. Conversely, export volumes are likely to remain sluggish due to inflationary pressures and economic slowdowns in key markets such as Sri Lanka, Africa, and Latin America.

Despite challenges, operating margins are expected to maintain pre-pandemic peaks of around 10%, supported by price hikes and stable raw material prices. However, increased discounts offered by CV makers due to sluggish sales volumes could partially impact operating margins.

Anil More, Associate Director at CRISIL Ratings, indicates that modest sales volume growth will increase capacity utilisation for CV makers, obviating the need for significant capacity additions and keeping capital spending in check. This, coupled with steady cash flows and strong balance sheets, is projected to improve key debt metrics for CV makers.

For CRISIL-rated players, interest coverage and debt to earnings before interest, tax, depreciation, and amortisation are expected to remain strong, ensuring financial stability. However, the overall performance of CV makers will remain subject to macroeconomic factors such as economic activity, interest rates, and inflationary pressures.