The long road to recovery for commercial vehicles

A host of factors such as over-capacity, slowing economic growth, soft freight rates, rising ownership and operating costs, etc has impacted the sales of commercial vehicles (CV) over the past few quarters. To overcome this challenge, vehicle makers are resorting to deep discount, rationalising inventory levels and deferring large capacity expansion plans. Inspite of these measures, the recovery in CV sales will be a long-drawn-out affair, says Rakesh Rao.

In the June quarter of 2019-20, India’s economy grew by 5 per cent (the slowest in over six years) and the effects of which were clearly reflected on the sales of commercial vehicle (CV) sales. According to a Business Standard report, the overall volume at India’s top four makers of medium & heavy CV (M&HCV) - Tata Motors, Ashok Leyland, Volvo Eicher, and Mahindra & Mahindra - fell 59.5 per cent to 12,568 units in August 2019, compared to 31,067 units the same month previous year.

Reasons for dwindling sales are multiple. Shamsher Dewan, Vice President & Sector Head - Corporate Ratings, ICRA Ltd, informs, “The CV industry has been hit by a host of factors which has impacted the sales over the past few quarters. In ICRA’s view, the domestic CV industry is currently facing over-capacity, partially contributed by revision in load carrying norms from July 2018 (resulted in 15-20 per cent increase in capacity of CV parc) and partially by GST implementation and the resultant improvement in turnaround time.”

Strong growth in commercial vehicle sales in recent years outpaced freight generation, leading to surplus capacity. Sales of CVs, which are directly linked to the movement of goods, can be considered as a barometer to gauge the performance of industrial activity. The economy is slowing, so is CV demand. Dewan elaborates, “The slowing economic growth and consequent subdued freight availability have further compounded the over-capacity issue, leading to soft freight rates over recent months. While slowdown in consumption-driven sectors has impacted the demand for general goods carriers and LCVs, the demand for tippers have also been impacted since Q4 FY2019 due to stalling of infrastructure projects. Additionally, the tractor trailer segment has also been impacted due to the slowdown in automobile sales and dispatches, which has impacted the car-carrier segment and their viability.”

Weak core-sector growth, lower government capex and slowdown in exports (due to global tensions) have aggravated the situation. Transition to BS VI norms has also increased the cost of the vehicle by minimum 10 per cent. “Additionally, the ownership costs have been increasing, with increased safety and regulatory requirements pushing up the costs of vehicles, in addition to hikes on the insurance, registration and renewal fees fronts. The soft freight rates, coupled with subdued freight availability, and increased operating costs (due to increase in insurance costs, tyre costs, interest rates, etc) have been exerting pressure on the viability of small fleet operators over recent quarters, and consequently, the CV financing system has turned cautious, with lending norms being tightened for mid-sized fleet operators and first-time buyers. Hence, financing availability has also acted as a negative lever post the NBFC crisis last year,” explains Shamsher Dewan.

Measures to mitigate slowdown

To clear existing BS IV stocks, vehicle makers are resorting to deep discount. Dewan comments, “CV OEMs, in general, have been increasing the discounts available to customers in order to incentivise sales. The current trends indicate that discount levels in the industry are at an all-time high.”

Given the weak demand and imminent phasing out of BS IV vehicles by the end of March 2020, automakers are opting for destocking and elongated planned shutdown. “With footfalls and retail sales remaining subdued, and inventory levels at dealerships being alarmingly high, and the impending transition to BS VI emission norms at the end of the fiscal (which would render current stock of BS IV vehicles as obsolete), CV OEMs have been aggressively reducing their dispatches to dealerships to help rationalise inventory levels in the system. Accordingly, wholesale dispatches from OEMs to dealerships have reduced by a sharp 33 per cent during July-August 2019 on a YoY basis,” states Dewan.

Automobile OEMs and their suppliers are also, in general, deferring any large capacity expansion plans, and investing only in capex related primarily to new technologies, including those for new emission norms, electric vehicles etc in order to conserve capital. “Additionally, with OEMs unable to pass on the costs increases due to new technologies completely to customers, and the peak discounting prevalent currently in the market, there is increased focus on cost-control initiatives so as to protect margins and credit metrics to the extent possible,” he says.

To bolster growth, the government in August 2019 announced a series of stimulus measures, such as doubling of depreciation rate to 30 per cent from 15 per cent on new vehicles purchased till March 2020 and removal of ban on purchase of new vehicles by government. However, it failed to lift the spirit of auto industry. “Automobile OEMs, in general, have been vying for government measures that would reduce the ownership costs for customers and hence, spur demand. While the Government has deferred the further proposed hikes in registration and renewal fees and announced additional depreciation benefits for purchases made till end of FY2020, the GST rate cut - which the industry has been demanding - has not been affected. Additionally, fleet owners, in general, have been pushing for reduction in the insurance charges and hefty fines imposed for traffic violations post the recently amended Motor Vehicle Act,” informs Shamsher Dewan.

Revival will take time

With GDP growth falling to an unexpected 5 per cent, a recovery in M&HCV sales is unlikely in the short run. “The current year outlook for the domestic CV industry is weak, with the industry volumes expected to contract in double-digits during the full year. For the next fiscal, recovery in the infrastructure execution cycle and announcement of a favourable scrappage policy would be critical for revival in CV sales,” opines Shamsher Dewan.

The government plans to bring out a renewed scrappage policy for vehicles, which can help reverse the current cyclical downturn. For example, if about 20 per cent of medium and heavy commercial vehicles (trucks) aged between 15 to 20 years are scrapped; there would be demand for 200,000 new units (which amounts to 50 per cent of annual truck sales based on last fiscal’s sales volume).

Similarly, the Road Transport Ministry is reportedly planning to increase renewal fees of registration of old private and commercial vehicles up to 25 times. According to the new proposal, which government intends to roll out by mid 2020, vehicle owner of a more than 15-year-old truck or bus will have to spend about Rs 25,000 (as compared to Rs 200 at present) to get fitness certificate every year. If the new scrappage policy gives some cash incentives to old vehicle owners, then sales of new vehicle may pick up as it will become costlier for owning old vehicles (due to the proposed hike in fitness certificate fee).

What’s trendy?

According to Shamsher Dewan, notwithstanding the current slowdown in the domestic CV industry, following are certain long-term trends visible in the industry:

• Shift towards higher tonnage trucks: Factors such as increasing consolidation of warehouses, better cost economics, improvement in road infrastructure, shortage of drivers and availability of higher-tonnage truck models have been driving a gradual shift in the industry towards higher tonnage trucks.
• Evolving regulations: The capital costs associated with CVs have been increasing steadily over recent years due to tightening requirements on safety, comfort, emissions etc. This would further increase over the near-term with the BS-VI emission norms coming into effect from April 1, 2020.
• Focus on cleaner technology: There has been increasing focus over recent years on electrification and adoption of cleaner fuels like LNG, which is likely to gain footing over the long-term. However, pricing and fueling/charging infrastructure remains key.
• Use of telematics: Increased use of telematics is expected to drive efficiency and customer engagement, and support reduction in cost of operations over the medium term.
• Dedicated freight corridors to increase competition from railways: While the road transportation sector has weaned away market share from railways over the years, the commercialisation of DFCs in upcoming months is expected to reverse the trend to some extent, at least in select commodities/products.

The CV industry volumes are expected to contract in double-digits during the current year. For the next fiscal, recovery in the infrastructure execution cycle and announcement of a favourable scrappage policy would be critical for revival in CV sales. Shamsher Dewan, VP & Sector Head - Corporate Ratings, ICRA Ltd