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Excess truck fleet capacity to extend medium and heavy truck segment recovery cycle: India Ratings

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MUMBAI: Due to excess capacity created by axle load norms in 2018, India Ratings and Research expects the sales of domestic commercial vehicles (CVs) could take longer to recover than expected, despite the improving macro-economic indicators such as Index of Industrial Production, output of core industries, and fuel consumption.

India Ratings expects the industry to return to double-digit growth due to the low base of FY20-FY21. It expects the medium and heavy truck segment could revive earlier if an assertive scrappage policy is introduced timely, stated the note.

The rating agency says while medium & heavy commercial vehicle (MHCV) sales are unlikely to recover before fourth quarter of next financial year, that of the light commercial vehicles (LCVs) have started to recover as they provide the last mile connectivity and because of increased e-commerce activities.

The tight liquidity continues to downplay overall demand. The sales volume decline in CVs even pre-covid was partly attributable to the liquidity crisis at non-banking financial companies (NBFCs) as broadly 60% of CVs sold are financed by NBFCs, according to Society of Indian Automobile Manufacturers (SIAM).

Though liquidity conditions at NBFCs have improved since then, it is still considerably tight. This coupled with the unwillingness of financial institutions to lend to the riskier portfolio would continue to act as a deterrent to growth.

While in 1HFY21, the total disbursed loans by key NBFCs fell 50% yoy, the decline in CV loan disbursements was higher at 75% yoy. The overall proportion of loans disbursed to the CV segment also dropped to 15% from 30% in 1HFY20.

Under MHCV, tipper trucks could see a demand coming from improving construction activities. As forecasted earlier, Ind-Ra believes that MHCV sales could decline by 35%-45% year on year (yoy) in FY21, though LCV sales decline is likely to be contained within 20%-25% yoy.

During April-September 2020, the CV sales volumes declined 56% yoy, with a steeper decline of 76% recorded in MHCVs, due to excess system capacity and lower fleet utilisation.

Rising demand from construction space will benefit tipper trucks. The construction sector witnessed demand revival in 2QFY21. The projects awarded also saw a sequential recovery in 2Q and the trend is likely to continue in 2HFY22.

The yoy growth in 2QFY21 was led by sectors such as roads, mining and water irrigation. This is likely to drive the demand for tipper truck sales as 70% of these trucks are employed in the construction sector.

The volume of tippers sold increased to 32% of the overall MHCV goods carriers in 1HFY21 (1HFY20: 24%).

The mining sector in particular could see some hiccups in the near term due to the auction of old iron ore mines whose leases expired in March 2020 as well as the auction of new coal mines. As the ramp-up could take some time, the transportation of goods could remain lower during that period.

The light commercial vehicles will benefit from agriculture and e-commerce: LCV sales fell 46% yoy during April-September 2020, though in 2QFY21, the decline was much lower at around 9% yoy. For FY21 as well, Ind-Ra expects the LCV sales decline to be lower than MHCV at 20%-25% yoy as against 35%-45% for the latter.

The segment would continue to benefit from increased e-commerce, as consumers prefer to stay indoors and due to last mile transportation particularly for essential commodities.

To be sure, the MHCV sub-segment which attained peak sales in FY19, suffered significantly with the onset of COVID-19 as economic activities reached an all-time low coupled with capex deferrals across sectors.

“The latest macro-economic indicators show a gradual improvement in economic activities, however, it is only likely to inch up the existing fleet utilisation. While the incremental demand for vehicles would need a sharper recovery,” added the note.

The Index of Industrial Production posted 3.6% yoy growth for October 2020. The output of eight core industries in October 2020 also improved sequentially, though dropped 2.5% yoy.

The e-way bill collection and diesel consumption recovered sharply in October 2020, indicating that road transportation, after being affected in the interim due to reduced fleet operators’ availability, has also reached close to pre-covid levels.

The profitability of fleet operators is under pressure. Despite sustained hike in diesel prices, the freight rates have not grown in tandem, which has further affected the cash flows. This is also reflected from the current collection efficiency under CV loans which has not yet reached pre-covid levels.

On the scrappage scheme, Ind Rating says policy could boost sales. The Ministry of Road, Transport and Highway is likely to roll out a vehicle scrappage policy to incentivise consumers to scrap their older vehicles. This would help to remove older fleet from the market and hence generate additional demand.

Though Ind-Ra believes that a large part of this demand would be addressed by used vehicles, it would be positive for new demand as well.

The first draft of scrappage policy is silent on the age limitation for vehicles, and incentives for scrap. Ind-Ra believes that industry would require a much assertive scrappage policy to boost the demand.

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