ICRA expects a gradual revival in commercial vehicle demand and the credit profile of CV OEMs to remain stable in the near to medium term. The domestic commercial vehicle industry started witnessing signs of recovery after two years of a down cycle on the back of replacement-led demand, favorable pricing owing to excise duty cut and continuation of discounts by OEMs.
In its latest research update on the commercial vehicle industry, ICRA says there has been a sharp recovery in M&HCV (truck) sales in recent quarters. The M&HCV (truck) segment is likely to register a growth of 12-14 per cent in FY2016 driven by the sustained trend towards replacement of ageing fleet and expectations of pick-up in demand from the infrastructure, mining and industrial sectors in view of the various reforms being initiated by the Government. In contrast, the LCV truck segment, however, continued to struggle owing to surplus capacity and the challenging financing environment, amidst rising NPA levels.
The third segment of the CV industry, viz., buses, also started witnessing recovery in sales from Q3 FY2015 onwards on the back of JNNURM-backed orders by SRTUs. The industry also witnessed an uptick in export sales of 11.3 per cent year-on-year as demand from nearby markets, especially Sri Lanka, Bangladesh and parts of the Middle East and Africa, improved. Moreover, domestic OEMs also benefited from their increasing focus on expanding market coverage and new model launches.
According to the ICRA study, unlike M&HCVs, the LCV segment is expected to grow at a modest pace of four-six per cent in FY2016 as its prospects continue to be influenced by overcapacity issues and constrained financing environment, amidst rising delinquencies. Demand for LCVs is expected to grow at a CAGR of 11-13 per cent over the longer term.
Further, the Indian CV industry is witnessing sizeable investments by OEMs towards upgrading their product portfolio, introducing new models and expanding manufacturing capacities. These investments are likely to allow some of the new players in strengthening their market hold. For example, BharatBenz has garnered a market share of ~6-8% in the 9-49t segment of the domestic M&HCV truck market (as on FY2015). The LCV segment would, however, continue to witness subdued demand on the back of overcapacity issues and challenging financing environment. Competition is likely to intensify across segments with the new model launches and expanding coverage by new OEMs.
With recovery in CV sales and improving earnings, ICRA expects the credit profile of OEMs to remain stable in the near to medium term on the back of higher internal cash flow generation and relatively limited capital expenditure requirements.