Pent-up demand post-GST and replacement cycle to drive sales
Domestic commercial vehicle sales seem to be back on track since July 2017, driven by pent-up demand post GST, healthy replacement-led demand, especially in the tractor trailer segment owing to stricter implementation of the CMVR regulations and pick-up in construction and mining activity, pushing demand for tipper trucks. The industry volumes prior to July had remained tepid during Q1 of FY 2018 due to pre-buying in Q4 FY 2017 and fleet operators deferring new vehicle purchases in view of the GST regulation from July.
As a result of these factors, domestic CV sales contracted by 9.1% during Q1 of FY 2018 on a y-o-y basis with M&HCV sales hit the most (down 32.6%), says an ICRA report. Further, the contraction was also due to limited availability of BS-IV compliant vehicles because of the uncertainty related to implementation of the new emission norms.
Commenting on the current scenario, Mr. Subrata Ray, Senior Group Vice-President, Corporate Sector ratings, ICRA, says: “The industry will find its momentum back aided by increased thrust on infrastructure and rural sectors in the recent Budget, potential implementation of fleet modernization or scrappage program and higher demand from consumption-driven sectors and e-commerce logistic service providers, especially for LCVs and ICVs. Post-GST, many underlying economic indicators have started showing initial signs of stabilization. Besides uptick in IIP and Core Industries, many of the other freight generating sectors such as steel, automobiles and port traffic are growing at a healthy pace. There has also been considerable improvement in cargo managed by Railways during the same period. Given these considerations, ICRA expects the domestic CV industry to register a growth of 6-7% in FY 2018.”
Within the CV industry, the M&HCV (truck) segment is likely to register a growth of 2-4% in FY 2018 aided by pent-up demand post GST, 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. In addition, the National Green Tribunal’s (NGT) thrust on phasing out old diesel vehicles along with the Government’s proposed vehicle modernization program would trigger replacement-led demand.
Apart from this, resumption of mining activities in select States would also continue to support demand for tippers, a segment which has outperformed the industry during the current fiscal. As companies across industries redesign their supply chain network and adopt the hub-n-spoke mode of transportation, demand for higher tonnage trucks (above 35T) is also expected to grow at a faster pace, which at present accounts for 15% and 30% of Indian truck market in terms of unit sales and tonnage, respectively.
The LCV (trucks), given the high proportion of first time buyers (FTBs), small fleet operators (SFOs) and dependence on rural markets, too is on a structural uptrend and has witnessed swift recovery with improvement in the liquidity situation. In the near term, replacement-led demand (following almost three years of declining sales) and expectation of stronger demand from consumption-driven sectors and E-commerce focused logistic companies would remain key growth drivers. Over the medium term, LCVs would also benefit from the roll-out of GST and its impact on the logistics sector and the preference for the hub-n-spoke model. Accordingly, ICRA expects this segment to grow 14-16% in FY 2018.
In contrast to the previous year, bus sales have also declined during the current fiscal (down 20.6% in H1 FY 2018) primarily on account of lower orders from the State Transport Undertakings (STUs) owing to lower budgetary allocation from the Centrally-sponsored schemes and their weak financial profile. Sales to the STU segment, which accounts for almost 30-35% of bus sales in India, have therefore contracted sharply.
Accordingly, ICRA expects 10-12% drop in bus sales during FY 2018 in comparison to the previous year. However, the segment’s prospects remain favorable over the medium term driven by the Government focus on improving urban as well as rural transportation and focus towards Smart Cities initiatives. Over the past few years, the segment has also benefited from healthy demand from online aggregators and the staff carriers segment, besides schools & colleges which remain a stable source of bus market in India. Further the fleet replacement cycle is gradually reducing with rising customer expectations for comfortable journey which is likely to reduce the average fleet age and spur replacement-led demand.
Regarding key profitability indicators, the aggregate financial performance of five leading CV OEMs is likely to see moderation in FY 2018 on a y-o-y basis on account of a sharp decline in the M&HCV (truck) and bus sales (in Q1), increase in discount levels and reversal in material costs because of partial recovery in steel prices and other overheads. Furthermore, OEMs may be unable to completely pass on the cost related to the BS-IV technology upgradation owing to relatively subdued demand. As a result, the aggregate OPBDIT margins are likely to remain range bound at 6.5-7% in FY 2018 in comparison to 6% in FY 2017.
However, the aggregate RoCE would improve marginally because of certain one-time write-off and impairments in the earnings in the previous fiscal. These impairments largely pertain to impairment of loans and investments in subsidiaries and associate companies by select entities.
Over the medium term, the key sensitivity to profitability indicators of CV OEMs would continue to be the increasing competitive pressures (as foreign OEMs scale up volumes on the back of new model launches and expanding sales network) and higher investments in developing new models and technologies to meet next level of emission norms.
Adds Mr. Ray: “Despite marginal contraction in earnings, we expect credit profile of CV OEMs to be stable in the near to medium term on back of relatively limited capital expenditure requirements. As industry’s capacity utilization levels remain around 50-55%, most OEMs are unlikely to invest in Greenfield units over the next 2-3 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. 31-33 billion per annum (on aggregate basis) over the medium term in the aforementioned areas.