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Auto Monitor

3 DECEMBER 2012

STUDY

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Near to medium term outlook pessimistic for CV segment: ICRA Jitin Makkar Shamsher Dewan Subrata Ray

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ith the onset of the slowing industrial growth and weakening investment sentiment across sectors, the strong growth phase of the domestic commercial vehicle (CV) industry came to standing halt since the second half of 201112. After experiencing a volume growth of over 30 percent during 2009-10 and 2010-11, the buoyancy in the domestic CV industry started dwindling from March 2012 onwards as headwinds stared gaining momentum. In 7m 2012-13, the domestic CV industry volumes grew by a moderate 4.3 percent over the corresponding period in the previous year, however segment-wise performance was characterized by a wide dispersion in growth rates. While the light commercial vehicle (LCV) segment continued to sustain the growth momentum with an increase of 18.2 percent in volumes on a YoY basis, the M&HCV bore the brunt of slowing industrial activity, weak investment sentiment and the impact of significant fleet capacity addition over the past three years, especially in the heavyduty categories of the trucking market. Within the M&HCV segment, while buses saw a recovery in volumes compared to the previous year on back of healthy off take from private segment and improving order inflows from STUs, the contraction in demand for the higher tonnage category of trucks such as tippers, tractor trailers and multi-axle vehicles (MAVs) has been the sharpest. As a result, the volumes in M&HCV (cargo) segment de-grew by 17.7 percent in 7m 2012-13.

Growth Drivers Our interaction with a host of dealers, transporters and financing institutions ref lect at an overall pessimistic outlook for the near term. It primarily stems from weak visibility on cargo availability, a key factor that continued to support fleet operator’s viability in 2011-12 despite almost flat freight rates and rising operating cost. From transporter’s viability standpoint, the current phase is marked by reduced cargo volumes, stiff competition owing to surplus capacities and rising operating costs, especially in wake of the recent hike in diesel prices. Although the freight rates have inched upwards following the hike in diesel rates, the extent of rise has not been adequate (on an aggregate basis) as it continues to be influenced by demand-supply dynamics in each market. As a result, capacity deferment and implementation of cost rationalization measures have been at the forefront for even the organized fleet transporters. That apart, the discount levels for new vehicles are nearing their peak levels, especially for heavy duty trucks. The only silver lining so far has been the trend in delinquencies across assets classes. As per our channel check, the deterioration in delinquencies has only been marginal, indicating that operators’ viability or the ability to generate cash flows has remained satisfactory so far. Credit availability also

continues to remain stable and there has not been a perceptible change in lending norms.

Trend in Market Share Along expected lines, Ashok Leyland made a good head start in the LCV segment with its first product offering ‘Dost’. With more model introductions in the medium term, we expect it to build upon its 7-8 percent market share in the LCV segment. In the M&HCV end of the market, both stalwarts – Tata Motors & Ashok Leyland faced competitive pressures owing to new model introductions and focus on expanding customer touch points by other OEMs. Specifically, in the M&HCV trucks segment, VE Commercial continued to strengthen its market position on back of increasing acceptability in the heavy-duty trucks market, while Mahindra Navistar performed better than the industry albeit on a low base. The outperformance of the southern region vis-à-vis rest of the country also helped Ashok Leyland in countering the impact of slowdown to some extent.

Capacity Expansion & Investment Plans In the recent past, the capacity expansion by industry participants in the commercial vehicle segment has been relatively modest and has been largely brownfield in nature as almost

Although the freight rates have inched upwards following the hike in diesel rates, the extent of rise has not been adequate as it continues to be influenced by demandsupply dynamics in each market. all the greenfield projects including Mahindra Navistar’s unit at Chakan and Bharat Benz’s unit near Chennai got commissioned between 2010-11 and 2011-12 respectively. Barring Tata Motors’ recent expansion at Dharwad (for the Tata Ace family), none of the other OEMs have significantly added capacities in the near term. Ashok Leyland too had shelved its plans to have a dedicated facility for LCVs and has been scaling up production of ‘Dost’ from the existing facilities. Among the new entrants, Mahindra Navistar started production during 201011 while Bharat Benz recently commenced production at its Chennai facility with capacity to produce 36,000 units/per annum in the initial phase. Many of the other OEMs eyeing the Indian market are either evaluating their business plans as of now or have

modest investments plans. For instance, while Hino (Toyota) has restricted its presence to completely built units (CBUs) in India, Scania has plans of only settingup an assembly unit in India that too with limited capacities. Given the business plans of new entrants, availability of adequate capacities and subdued outlook on the industry, we don’t expect OEMs to expand capacities over the medium term. Conversely, the domestic players have been investing in upgrading their product portfolios in anticipation of rising competitive intensity from foreign OEMs. Over the past few years, both Tata Motors and Ashok Leyland have significantly upgraded their platforms, while VE Commercial Vehicles has strengthened its product offerings in the heavy-duty segments. Both, Tata Motors and Ashok Leyland now have multiple offerings across tonnage categories. Investments in higher capacity engines, advanced transmission systems and cabins to improve upon the driving conditions/comfort have also gained momentum in the recent past.

by expectation of improvement in economic growth, increasing pace of investments in highway & road infrastructure and structural changes supporting the demand in favour of trucks. Among these, we believe, a) the gradual traction in market share from railways, b) changing landscape of the logistics industry towards an organized one, and c) stricter implementation of emission & anti-overloading norms would continue to support demand for CVs. Overall, we expect the domestic CV industry to report a more moderate volume growth of 3.5 percent in 2012-13 led by demand slowdown in the M&HCV end of the market. However, the industry would start seeing improvement from 2013-14 onwards driven by pickup in replacement demand as well as low-base effect. The sustainability of the demand would however continue to remain dependent on the improvement in macro-economic environment and investment sentiment. We expect the domestic M&HCV volumes to expand by eight percent and LCVs to register a growth of 13-14 percent in 2013-14.

Outlook While the near term outlook on the CV industry appears subdued considering the weakness in the underlying demand indicators, the long-term prospects continue to be supported 

Auto Monitor - 3 December 2012  

'AUTO MONITOR’, India’s leading weekly automotive news magazine, focusses on offering a broad platform to the automotive industry. It strive...

Auto Monitor - 3 December 2012  

'AUTO MONITOR’, India’s leading weekly automotive news magazine, focusses on offering a broad platform to the automotive industry. It strive...

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