Implementation of BS-VI would raise cost of heavy trucks by 10-12%

MHCV sales, which rose at a modest ~5 per cent CAGR between fiscals 2013 and 2018, will see a moderate growth of 6-8 per cent CAGR between fiscals 2018 and 2023. Hetal Gandhi, Director, CRISIL Research explains, factors driving the growth will be an improvement in industrial activity, steady agricultural output and the government's focus on infrastructure.

FY2017-18 saw the CV industry reach the highest sales after 5 years, with domestic figures touching 8.56 lakh units. What is your opinion on this? How much did the MHCV segment contribute to this figure?

Domestic commercial vehicle (CV) sales rose ~20 percent in fiscal 2018 to 8.56 lakh units. light commercial vehicles (LCVs) and medium and heavy commercial vehicles (MHCV) witnessed growth of ~25 per cent and ~13 per cent respectively. The domestic CV sales reached an all-time high in FY18 while domestic MHCV sales reached the highest sales since FY12. Weakening economy, rise in NPA levels and thereby lower finance availability led to a decline in MHCV sales post the highs of FY12. However, MHCV sales rebounded from FY15 as economy picked up steam. Stricter implementation of overloading ban, and OEM aggressiveness through high discounts propelled MHCV sales further. LCV sales, too, fell with lower redistribution freight and finance availability post FY13. With greater number of vehicles coming up for replacement, improving finance availability and higher private consumption LCV sales rebounded from FY16 onwards.

A robust growth of ~13 per cent in sales of MHCV in FY18 despite weak demand for buses was on the back of stricter implementation of the ban on overloading (especially in Rajasthan and Uttar Pradesh) led to a need for higher tonnage vehicles. Transport operators, especially small fleet operators, who are more prone to overloading were impacted. As their fleet was insufficient to move all the freight at rated load, sales of heavy tonnage vehicles increased. In the first quarter of fiscal 2018, supply constraints compelled most CV manufacturers to keep discounts at lower levels. Moreover, with increase in supply in subsequent quarters and to recoup volumes lost in the first quarter of fiscal 2018, OEMs started offering huge discounts. In some cases, BS IV vehicles were available at BS-III prices or below. Availability of finance had improved in FY18 aided by attractive schemes propelling demand. Demand from end-use segments such as consumer durables, cement, agriculture, dairy and e-commerce logistics also provided support. While the goods segment performed well, weak demand for State Transport Undertakings and intercity travel operators hampered demand for MHCV buses.

What were the reasons for M&HCV's downward growth trajectory in the last few months?

In the past three months (November-January) in FY19, domestic MHCV sales fell by 11 per cent because MHCV sales between November-January of FY18 grew by 48 per cent on-year due to stricter implementation of the overloading ban in north India, and as large fleet operators were able to get input tax credit on purchase of trucks incentivising CV purchases. Axle norms have increased the freight carrying capacity of trucks by around 20 per cent, however, the freight demand has not been able to absorb this additional capacity, resulting in lowering of demand for heavy trucks to some extent.

What helped it pick up, since M&HCV sales grew by 114 percent in April-May 2018 over the same period last year?

Between April-May 2018, commercial vehicle demand grew at a robust pace aided by a low base. Sales were lower in April-November 2017 after implementation of BS-IV norm, on account of capacity constraints by OEMs in manufacturing vehicles, higher cost of ownership of BS-IV vehicles and advanced purchases of sales into FY17 from FY18. MHCV sales was also higher due to higher government spend on infrastructure and OEM aggressiveness during the period.

Do you think there will be an increase in M&HCV exports? If yes/no, then why?

MHCV exports during April 2018 to January 2019 grew by around 14 per cent. But if we see the export growth between April and October 2018 it comes to around 29 per cent on-year. This was due to low base of April to October 2017 as OEMs were not able to produce enough vehicles to export on account of capacity constraints after implementation of BS-IV norms. With production normalising and uptick in demand from export destinations, CV exports started accelerating from November 2017 creating a high base over which H2FY19 is showing weak growth. Overall, MHCV exports is expected to rise by 10-15 per cent in FY19. The export destination which have contributed to the increase in demand of M&HCV trucks are Bangladesh, Nepal and key markets in South and East Africa. Going ahead we expect a modest uptick in exports with demand from SAARC and African countries despite weakening global economy.

Trucks in the range of 35-40 tonne grew over 100 per cent and saw a total sales of 27,936 units. Are we going to see a change in this trend or will it remain for a while?

Higher tonnage (31T and above) multi axle rigid vehicles (MAV) is expected to have grown between 37-42 per cent on-year during April-December FY19, higher than the 25T MAVs during the same period due to a shift towards higher tonnage vehicles. Higher tonnage vehicles were preferred due their better cost economics, stricter implementation of overloading norm and higher payload size of freight after consolidation of warehouses post GST. However, after implementation of the axle norm, which increased freight carrying capacity of trucks by ~20 per cent, this shift is expected to slow down.

With more than just a year left for roll-out, how will BS VI impact the M&HCV segment overall? How prepared is the industry for BS VI?

Implementation of BS-VI norm from April 2020 would raise cost of heavy trucks to the tune of 10-12 per cent. Transporters are also expected to be cautious in accepting BS-VI trucks as they would have concerns over the vehicle’s fuel efficiency and maintenance cost. This is expected to lead to an advancement of truck purchases from FY21 into FY20.

CRISIL Research’s interactions with OEMs, both before and after the Supreme court order indicate that OEMs are extremely cautious having burnt their fingers last time during the BS III to BS IV transition. Due to this, OEMs are expected to cease production of BS-IV vehicles well before the March 2020 deadline.

Where do you see the M&HCV segment going in the next couple of years?

MHCV sales, which rose at a modest ~5 per cent CAGR between fiscals 2013 and 2018, will see a moderate growth of 6-8 per cent CAGR between fiscals 2018 and 2023. Factors driving the growth will be an improvement in industrial activity, steady agricultural output and the government's focus on infrastructure. However, a full recovery will be limited as better road infrastructure, efficiency achieved after the goods and services tax implementation, shift to higher tonnage trucks and the commissioning of dedicated freight corridors could provide some downside to the volume growth. We expect MHCV bus sales to be aided by growth in urban population, demand from schools and corporates, improved road infrastructure and increased inter-city travel. The government's thrust on rural transportation will also aid the demand.

Moreover, the draft national logistics policy announced in February 2019, proposes to lower logistics cost as a percentage of gross national product (GDP) by 300-400 basis points to 10 per cent over the next five fiscals by reducing the share of roads in domestic freight transportation and increasing share of railways and waterways (transportation by railways and waterways are 2/3rd and 1/3rd of road transportation cost). The objective seems ambitious given that the current stock of pliable trucks can cater to 60 per cent of total freight available presently. Having said that, with the government’s thrust towards railways and waterways, it can lead to some shift in modal share over the next five years. But keeping in mind the challenges associated with first and last mile transportation (for rail and waterways) roads is expected to continue being the preferred mode for movement of non-bulk commodities.

Axle norms have increased the freight carrying capacity of trucks by around 20 per cent, however, the freight demand has not been able to absorb this additional capacity, resulting in lowering of demand for heavy trucks to some extent.