The impact of government policies and a generally bad quarter has left the commercial vehicle industry grappling. However, the ICRA remains hopeful about the forthcoming half of FY 2018, citing several factors that can lead to the CV sector growing by seven per cent.
In the previous financial year leading upto the first half of the current one, several policy changes have impacted the growth of the automotive sector such as the implementation of GST, demonetisation, and the subsequent ban on sale of BS-III vehicles. The Indian commercial vehicles industry, says the International Credit Ratings Agency (ICRA), has registered a contraction in their domestic sales by 9.1 per cent during Q1 FY 2018 on a YoY basis. Of these, the medium and heavy commercial vehicles (MHCV) truck sales took the worst hit with a contraction of 32.6 per cent. The ICRA report notes that the pre-buying spree the industry witnessed in the fourth quarter of FY 2017 was in part to blame for the sales contraction in H1 FY 2018. One of the reasons that fleet owners were reluctant to purchase vehicles, was the anticipatory phase into which many industries were thrown due to the impending GST implementation. The uncertainty that followed the implementation of the new emission norms and the lack of BS-IV compliant vehicles also contibuted to the decrease in CV sales.
The situation so far
Along with the MHCV segment, the light commercial vehicles (LCV) segment has also experienced a drop in sales percentages. The segment that was impacted by demonetisation (due to dependance on rural markets), has been experiencing a decline for the past three years due to the high proprtion of first-time buyers (FTB) and small-fleet operator (SFO).
ICRA reports that bus sales are down by 20.6 per cent as compared to the previous year due to the low order inflow from State Road Transport Undertakings (SRTU) owing to lower budgetary allocation from the centre and lack of a strong financial profile. SRTU contracts account for almost 30 to 35 per cent of bus sales in India. Apart from that, uncertainty in the implementation of bus body code has left customers confused as to what to choose: fully-built vehicles or building vehicles through third-party builders.
Exports have been taking a hit due to policy uncertainty in foreign markets especially South-East Asia and Africa. For instance, the report states that demand from Sri Lanka -one of India’s most important market - has been impacted by restriction on financing norms for automobiles and hike in import duties. Moreover, macro-economic challenges and currency devaluation in select African markets have also contributed to the slowdown. Overall, the CV export rate has experinced sharp contraction of 28.5 per cent.
In spite of the poor performance in the previous quarter, ICRA predicts that there is still hope for the CV industry, if only one pays attention to key economic indicators that will contribute to the expansion and growth of sales.
Government policies have been pushing for greener technology that contribute to fuel efficiency and reduced emissions. Keeping that in mind, vehicles that are produced according to the newest policy specifications are being purchased to replace the older ones in the customer’s fleet.
The report cites that the MHCV segment is predicted to grow at a rate of two to four per cent, stating replacement-led demand as one of the drivers of growth. In the case of MHCVs, the National Green Tribunal’s (NGT) push towards phasing out old vehicles that run on diesel in favour of modernised vehicels has triggered a demand in this segment. A healthy replacement-led demand especially in tractor trailer segment owing to stricter implementation of CMVR regulations and pick-up in construction and mining activity, is also driving the demand for tipper trucks.
Considering the three years of declining sales, already purchased LCVs may not be in keeping with emission norms. The report predicts that LCV sales will register a growth of 14 to 16 per cent and replacemnet-led demand is believed to revive the segment’s declining sales in the near-term, considering the three years of declining sales. Another push towards growth may come from strong demand from consumption-driven sectors and e-commerce focused logistics companies.
As for buses, customer expectations for a comfortable journey are constantly rising. This will spur demand for buses from reduced fleet age due to expectations for a comfortable journey which will also reduce fleet replacement cycle gradually.
Pent-up industry demand:
The transition to GST could be seen as disruptive period, but many industries are now gaining their momentum and stabilising. Core industries and others such as steel, automobiles, port traffic, are growing at a healthy pace. This may be why the ICRA expects the domestic CV industry to register a growth of six to seven per cent in FY 2018.
Growth-led demand for tipper trucks is supported by mining being resumed in several states. ICRA also notes that the segment has outperformed the industry during the current fiscal. The revamping of their supply chain network and adopting a “hub-and-spoke” model has forced companies to buy higher tonnage trucks (above 35 T), which at present accounts for 15 per cent of unit sales in the Indian truck market. The demand build-up cannot be ignored, in addition to “higher budgetary allocation towards infrastructure and rural sectors and stricter implementation of regulatory norms especially related to vehicle length (for certain applications) and overloading norms”.
The LCV segment is believed to benefit from the GST roll-out as well its impact on the logistics sector. The hub-and-spoke model of distribution, which is preferred by industries, will also prove conducive to growth.
While the ICRA expects a drop in the sales of buses (10 to 12 per cent), the segment is expectd to grow in the medium term as the government focuses on urban and rural transport development and Smart City initiatives. The report, additionally, terms demand from online aggregators and staff carriers as “healthy” and a “stable source for the bus market in India”.
Hope for exports:
CV OEMs are still hopeful about the future of exports as they are preparing for expansion in the Middle East, Asian and African markets. In addition, new product line-up and technology upgradation are now allow them to enter relatively advance markets of South-East Asia.
ICRA believes that CV exports are likely to grow at a CAGR of 12 to 15 per cent over the medium-term, driven by a combination of expanding market coverage by Indian OEMs in new markets, scale-up in exports from foreign CV OEMs and growing demand from some of the existing markets in the SAARC region. In order to compete more effectively with foreign OEMs, especially from China, domestic players have also renewed their plans of setting up assembly operations in multiple markets, a strategy which had taken a back seat in the past few years.
The future of CV OEMs
The ICRA believes the performace of OEMs in FY 2018 is likely to remain at 6.5 to seven per cent as compared to six per cent in FY 2017, on account of the sharp decline in MHCV and bus sales in the first quarter. On top of that, OEMs may not be able to cover costs related to BS-IV technology upgradation owing to relatively subdued demand. Increase in discount levels and reversal in material costs because of partial recovery in steel prices and other overheads are other reasons why they may not see a bigger growth margin.
Despite marginal contraction in earnings, credit profile of CV OEMs are expected to remain stable in the near-to-medium term on back of relatively limited CAPEX requirements. As industry’s capacity utilisation levels remain around 50 to 55 per cent, most OEMs are unlikely to invest in Greenfield units over the next three years. This would mean that overall investments will be limited to new product development, addressing portfolio gaps and technology upgradation related to next level of emission norms. With an eye of growing international business, some of the OEMs are also contemplating setting-up assembly units overseas. ICRA estimates the CV OEMs will spend approximately Rs 31 to 33 billion pa(on aggregate basis) over the medium-term in the aforementioned areas.
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