Indian CV industry in one of its most progressive phases

The Indian commercial vehicle industry, often referred to as the backbone of the country’s economy, is witnessing strong growth. If the numbers of the past few months are a testimony to the industry’s performance, one can easily assert that it has come out of the BS-III sales ban and GST to enter a finest phase for its progress.

Ms. Binaifer Jehani, Director, CRISIL Research

We spoke to Ms. Binaifer Jehani – Director, CRISIL Research, on various topics like truck fleet utilization, factors likely to boost truck sales, hindrances to the growth of reefer vehicles, the technology disrupting transportation and the potential of the auto components aftermarket in the wake of the growth phase. Ms. Jehani who heads the research function on the automobile, infrastructure, logistics and real estate sectors at CRISIL Research is responsible for overseeing a large team of analysts, offering comprehensive research coverage of these sectors.

Excerpts:

What are your views of the macro and micro scenarios affecting the current sales of trucks and buses in India compared to the previous years?

In fiscal 18, despite being weighed down by multiple factors such as the lingering impact of demonetisation, BS-III to BS-IV transition leading to a price increase and uncertainty during the implementation of GST, the commercial vehicle industry registered a robust growth of 20%. The light commercial vehicle segment grew by 29% buoyed by healthy replacement demand and pick-up in private consumption. Medium and heavy commercial vehicles (MHCVs) too registered a 19% growth aided by stringency on overloading norms, leading to transporters shifting to higher tonnage vehicles. Buses were the only segment to de-grow (by 14%) due to poor demand from STUs, staff as well as the tourism segments.

While freight demand was subdued in fiscal 18, regulatory factors aided demand growth. In the current fiscal, we are seeing a pick-up in freight demand. This is largely aided by public expenditure on infrastructure projects. Awarding of contracts for NHAI peaked during FY18 at around 7400 km. Much of the awarded contracts will come under execution in the current fiscal. Affordable housing and irrigation projects too are contributing to incremental demand for MHCVs.

On the light commercial vehicle side, demand is seen further improving, and replacement demand is also better as compared to the previous fiscal. We see both the light and the heavy segments continuing their growth momentum in the current fiscal. Buses, after de-growing in fiscal 18 are expected to bounce back, although moderately in the current fiscal.

Micro factors impacting the industry are an increase in diesel prices and reduction in stringency on overloading in few key States in the North. Hike in diesel price over the past few months has been transporter profitability, especially for the small fleet operators in the MHCV segment and large part of the LCV segment. Although freight demand has improved, it still hasn’t picked up to the level that transporters can pass on the increase in diesel prices completely to the consignors. On the overloading stringency front, reduction in stringency in a few key States is leading to a drop in truck utilisation levels in those regions, due to huge spurt in sales seen in the region in the previous fiscal. Overloading stringency remains one of the key monitorable in the current fiscal.

Are there any specific segments that you see growing more than the other, like the on-highway vs. the off-highway or light & medium duty vs. the multi axles, farm equipment vs. construction equipment?

Since infrastructure projects are on an upswing, the tipper segment is performing well. This is expected to continue in the near term keeping in mind the Government focus on completing many projects on priority before March 2019 and also due to the expectation of fresh awarding during the current fiscal. Small commercial vehicles too are expected to show strong growth due the expectation of a third good monsoon, improvement in private consumption and strong support from replacement demand.

Many industry people speak highly about the potential of the cold chain industry, as much as the share would double in the next five years owing to the demand from the meat and sea food industry. What can be done to better the investments in the last mile or even first mile reefer vehicles? Is there scope for two or more organized players to work together to bridge the first and last-mile gap through their reefer vehicles?

CRISIL Research estimates the size of the cold chain industry to be at Rs. 248 billion in fiscal 2017. The industry is dominated by temperature controlled warehouses (TCW) which account for 85-95% of the industry. Over the next five years, the industry is expected to grow at a robust pace of 13-15% to Rs. 470-475 billion, driven by a rise in demand from end-user industries such as meat, seafood, fruits & vegetables and pharmaceuticals, among others. Moreover, the increasing presence of the Organized Quick Service Restaurants and organized retail is expected to increase the penetration of cold chain further. Currently OEMs are supplying vehicles with chassis/cowls; however, they are moving towards fully-built vehicles slowly and gradually. But, for special applications like reefer vehicles they will have to get in touch with specialized body builders who can design bodies basis the specifications of the vehicles and the expected application. Yes, there is scope for two or more organized players to work together to bridge the first and last-mile gap through their reefer vehicles.

What do you gauge of the current state of the cold-chain industry in India? Does the sector’s growth suffer from the over-reliance on the pharmaceutical needs or is there so much opportunity in the other sectors that the highly unorganized and fragmented sector doesn’t bother about tapping?

Most of the cold chain service providers even today are dependent on potatoes and apples. However, with increasing penetration of the organized retail and more organized players investing in the cold chain industry, we expect the industry to emerge as a value provider over the medium to long term. The margin in the non-traditional sectors is one of the key reasons for the players to look beyond potatoes/apples.

How do you see the growth of Ola and Uber kind of business models in the transport industry? Can they be disruptive or traditional fleet operators, with their use of GPRS and telematics, be a tough competition to them?

Access to new technologies is increasing at a fast pace for all. The difference that Ola and Uber are providing is efficient use of such technology to serve multiple stakeholder needs. For the driver, they are ensuring increased utilization of cabs (more km with the passenger inside) than dry run. For the customer it is enabling doorstep pick-up and air-conditioning. In the bargain the cab aggregator segment has set up a platform where millions of trips are booked annually thereby enabling a good cash flow for its business over the long run.

The traditional cabs are definitely facing the heat from this more efficient way of functioning. Many drivers and transport operators have attached their fleet with the cab-aggregator segment. We believe that over the medium term much of the traditional intra-city cabs will either merge with the existing cab-aggregators or initiate such platforms of their own. If we talk about the automotive industry, while in the short run the cab-aggregator segment will aid volume growth for the industry, over the medium to long term this segment will shave off slight growth for the passenger car industry. This is owing to increased usage of shared cabs and higher asset utilization of vehicles.

What is your view of the auto component aftermarket in India, especially for key components such as bearings, clutches, brake liners, axles, couplings, etc.?

The Indian auto component aftermarket is expected to clock steady growth in the years to come. Fast-moving items like bearings, clutch plates and brake pads will continue to hit growth on account of consistent wear and tear due to higher running. Brake liners and axles are replaced at longer intervals and hence contribution to replacement/aftermarket demand is low/limited. These parts get largely replaced on account of accidents/severe damage to vehicles.