Budget’s continued thrust on infrastructure and other government initiatives for rural development & last-mile connectivity for goods are likely to help commercial vehicles segment to scale new heights.
While presenting the budget, Finance Minister Arun Jaitley focused on infrastructure development towards road construction, railways and air travel. This bodes well for spurring economic activity in many industries such as sectors construction equipment, commercial vehicles, etc.
Budget has increased investment in infrastructure by almost Rs 1 lakh crore to improve rural connectivity. Mukhtyar added, “The focus will be on improving the road network through the Bharatmala network of building/widening almost 35,000 km of road ways. Accelerated execution of road projects will have a positive impact on automotive industry in the long term. In the short-to-medium-term, the commercial vehicle segment will benefit substantially through this push,” says Kavan Mukhtyar, Leader - Automotive, PwC India.
The minimum support prices for the agriculture segment and higher budgetary allocation for the rural, agriculture and allied sectors should generate discretionary spending that is likely to spur consumption led demand and push rural economic growth. These initiatives will have a positive impact on tractors, two-wheelers and utility vehicle segments.
The budget emphasises on boosting income for rural populace and improving farming which is good news for the automotive industry. “The agri-market and infrastructure allocation of Rs 2,000 crores will translate into demand for farming equipment and light commercial vehicles. Increase in rural credit will also have positive implications on the much needed finance penetration here,” opines Vinod Aggarwal, MD & CEO, VE Commercial Vehicles.
From the CV industry perspective, the government’s continued focus on infrastructure will be a growth booster. With 21 per cent more expenditure towards infrastructure and allocation of Rs 5.97 lakh crores, the government aims to ensure India remains one of the fastest growing economies in the world. “The FM also confirmed exceeding the highway construction target of 9000 km by end of FY18. The face of India is continuously evolving on back of improving road connectivity and the pace of urban development and Smart Cities. All of this is positive for the CV industry, especially the construction and mining segment players. Real-estate incentives like affordable housing will also help growth of construction equipment,” says Aggarwal.
Reduction in corporate income tax from 30 per cent to 25 per cent for companies with turnover upto Rs 250 crores, increasing credit and building capability in the MSME through the Mudra bank will also be beneficial to the light commercial and utility vehicle segment.
Did budget miss the bus?
One of the proposals that will unnerve the CV industry is the high in customs duty on imported CBU (completely built units) of motor vehicles (trucks and buses) from 20 per cent to 25 per cent. At the same time, customs duty on select items such as engine and transmission parts, brakes and parts thereof, suspension and parts thereof, gear boxes and parts thereof, airbags etc have also been enhanced from 7.5/10 per cent to 15 per cent. This will lead to escalation in production of vehicle.
“While we are proud to support the government’s Make in India initiative, the government is increasing the import duty from 10 per cent to 15 per cent for a range of parts and components, including for commercial vehicles and bus components, to help drive the initiative and generate additional revenues. This will directly impact our cost and businesses will have to make those associated pricing calls. In separate news, for commercial vehicles and buses there is a chance for GST rates reduction from the current level of 28 per cent,” explains Dimitrov Krishnan, vice president and head of Volvo CE India.
The industry was expecting a clear policy roadmap especially for electrification and end-of-the-life vehicles. But the budget was found wanting on both these issues. Aggarwal opines, “We missed guidance on the much awaited old trucks scrappage policy. This was much needed as it will help clear pre-used truck inventory and further boost demand. It also has many positive implications on government revenue and will also help bring down pollution.”
CV in overdrive
The domestic CV industry led by truck segment has been on a recovery phase since the beginning of second quarter of FY 2018. In the first 10 months of FY 2018-19, the domestic CV sales have grown by 17.9 per cent primarily driven by healthy growth in the LCV (truck) and M&HCV (truck) segment, while bus sales have contracted sharply on back of weak SRTU (state road transport undertakings) orders. “The stellar volume growth during the last few months is also driven by inventory clearance by OEMs ahead of mandatory roll-out of HVAC/blower in heavy-duty trucks from January 2018. Consequently, there could be sequential moderation in volumes in February 2018 on account of pre-buying activity because of BS-IV norms in February and March 2017,” according to ICRA Ltd’s recent study.
Within the CV space, the M&HCV (truck) has grown by 17.3 per cent in volume terms aided by pent-up demand post GST implementation, stricter implementation of overloading norms as well as healthy demand for tippers (from construction sector) and HCVs (from select industries like car carriers, petroleum products, container traffic). Likewise, the LCV (truck) segment has also witnessed a strong growth of 27.5 per cent in volume terms driven by replacement cycle, improving financing environment and pick-up rural demand. “While truck sales have picked-up sharply, demand for bus has weakened considerably (down 16.7 per cent YTD) owing to weak orders from both SRTUs and private segment. Tata Motors Ltd (TML) gained market share in LCV as well as M&HCV space aided by addressing gaps its product portfolio,” said the ICRA report.
In fact, Tata Motors’ commercial vehicles division registered a strong domestic sales performance in January 2018 with sale of 39,386 units, a growth of 38 per cent, compared to 28,521 units in January 2017. The growth in sales was driven by the construction, manufacturing and logistics sectors.
“The year 2018 has started with a positive note witnessing 38 per cent growth over January 2017. We have seen a consistent growth momentum in the Commercial Vehicles segment on account of robust infrastructural developments along with logistics requirements owing to the rising requirement from the construction sector. With continuously increasing customer acceptance of the Tata Range of BS4 vehicles with superior SCR Technology, the M&HCV segment grew by 12.5 per cent with increased demand for trucks led by restrictions on overloading, fresh tenders in the car carrier and petroleum sectors as well as coal and cement movement triggered by on-going infrastructure projects,” said Girish Wagh, President, Commercial Vehicles Business Unit, Tata Motors Ltd, in a statement.
Similarly, VE Commercial Vehicles Ltd (a Volvo Group and Eicher Motors joint venture) sold 6801 units in January 2018 as compared to 4515 units in January 2017, recording a growth of 50.6 per cent. This includes 6712 units of Eicher brand and 89 units of Volvo brand.
The introduction of GST on July 1, 2017 has further accelerated the shift in customer demand towards modern, more capable and reliable trucks. For example, Daimler India Commercial Vehicles (DICV) recorded 2017 as the most successful year in its young history. In its domestic business, DICV sold 16,717 BharatBenz trucks in 2017, up 28 per cent compared to 13,081 units in 2016. Strong momentum from fresh products and tailwind from regulatory changes in the market environment drove domestic sales to new heights. “2017 was a very good year for DICV and for BharatBenz. The transition to BS-IV and the introduction of GST were the long-expected game changers for the Indian CV industry. Based on our strong product portfolio and customer response, we expect further significant growth,” said Erich Nesselhauf, Managing Director and CEO, Daimler India Commercial Vehicles in a press release.
The continued investment by the government in infrastructure, housing and other major projects (like Sagar Mala, freight corridor, smart cities, etc) are bound to create good demand for commercial vehicles. With rebound in sales growth in 2017 and the early signs showing healthy demand this year, commercial vehicle makers are confident to further improve their performance in 2018.
The face of India is continuously evolving on back of improving road connectivity and the pace of urban development and Smart Cities. All of this is positive for the CV industry, especially the construction and mining segment players.
- Vinod Aggarwal, MD & CEO, VE Commercial Vehicles
Accelerated execution of road projects will have a positive impact on automotive industry in the long term. In the short-to-medium-term, the commercial vehicle segment will benefit substantially through this push.
- Kavan Mukhtyar, Leader - Automotive, PwC India