India Ratings’ director of corporate ratings, Sudarshan Shreenivas, believes it could be the start of a down-cycle for M&HCVs — he points to weak industrial growth, flattish growth in freight rates and weak replacement demand. The decline in M&HCVs in FY17 was led by the steep fall in demand for heavy trucks. India Ratings expects FY18 volumes for M&HCVs to fall nine to 12 per cent.
Most analysts believe the near-term outlook is not positive for the sector. Binaifer F Jehani, director for industry
& customised research at CRISIL Research, says growth is expected to be back-ended (more in the second half of the financial year), with the current quarter (April-June) likely to be a muted one. Some of this could be attributed to the ongoing slowing in demand. Especially with CV fleet operators preferring to postpone their purchase decisions than to lock-in attractive deals with the BS-III standard of emission vehicles, available six to 10 per cent cheaper than the BS-IV variants.
Says Jehani: “With lower utilisation levels, moderate freight levels and no shortage of supply, there was no need to pre-buy BS-III vehicles only for the discount, given the lack of demand and uncertainty around GST (the coming goods and services tax).”
The biggest hindrance, in addition to muted demand, in March quarter sales has been the lack of clarity on GST. Analysts say the postponing of purchase decisions was largely due to assumptions that GST would lead to reduction in duties and, thus, cost. However, CARE Ratings’ Darshini Kansara believes the coming tax will be neutral on cost and price impact.
M&HCV makers, however, are confident of a recovery. Ashok Leyland expects the CV market to rebound in the June quarter, given the muted pre-buying in the earlier one and the improving macro variables like Gross Domestic Product and recovery in infra and mining. The company, with 10,000 units of unsold stock, says it is also confident of disposing this through export and by upgrading to meet BS-IV norms. The company is confident of such retrofitting, with older BS-III engines sold in the replacement market, either complete or in parts. Tata Motors too has unsold stocks, half of which it would be exporting while retrofitting the others to BS-IV standard.
Ravindra Pisharody, executive director, CV business unit, Tata Motors, expects CV volumes, supported by a favourable monsoons and GST rate, to grow 10-15 per cent. With the GST rate likely to be 28 per cent, he expects sales to increase from the September quarter. Tata Motors expects M&HCV volumes to gain momentum after the first quarter, as customers will take some time to get accustomed with the new prices after BS IV.
The sector is hoping for a recovery, which most analysts expect to come in the second half of this financial year. Rating agency ICRA expects the M&HCV market to recover, aided by higher budgetary allocation towards the infrastructure and rural sectors, a vehicle scrappage programme and strict implementation of overloading rules. Given the thrust on infrastructure and improvement in mining activity, the sector will look at higher sales of tippers which account for 17 per cent of M&HCV volumes. In addition, a scrappage policy if approved would mean additional sales of 135,000 to 200,000 trucks in a span of 12 months after its implementation.
Unlike the muted M&HCV outlook, the light CV segment is expected to fare better, driven by online retail sales and demand for last-mile connectivity. Analysts estimates five to eight per cent growth in FY18. “Owing to minimal impact of BS IV on LCVs and limited pre-buying towards the end of FY17, LCVs are expected to witness robust growth,” says Pisharody of Tata Motors.
Given the muted outlook, investors should await a recovery in volumes before taking any exposure to the segment. Especially to Ashok Leyland, purely a commercial vehicle entity, unlike Eicher (two-wheeler business) and Tata Motors (its JLR arm).