The Indian CV Industry is expected to register good growth numbers across different segments, driven by the slew of forward-looking changes taking place in the market. The M&HCV (truck) segment is likely to register a growth of 6-8% in FY 2018 aided by higher budgetary allocation towards infrastructure and rural sectors, potential implementation of vehicle scrappage program and stricter implementation of regulatory norms especially related to vehicle length (for certain applications) and overloading norms, says a report by ICRA research. In addition, it is expected that the National Green Tribunal (NGT’s) thrust on phasing out old diesel vehicles along with Government’s proposed vehicle modernization program would trigger replacement-led demand. Apart from favorable regulatory developments, resumption of mining activities in select states would also continue to support demand for tippers, a segment which has outperformed the industry during the current fiscal.
ICRA believes that as a result of pre-buying (although lower than expected), CV demand would be relatively subdued in early part of the FY 2018. Moreover, with possible implementation of GST, fleet operators are likely to put their investment plans on hold, while OEMs would also prefer to align their production and inventory levels to the new taxation regime. Accordingly, the near-term outlook is subdued. Nevertheless, ICRA expects that industry will find its momentum back a) aided by increased thrust on infrastructure and rural sectors in the recent budget, b) potential implementation of fleet modernization or scrappage program and c) higher demand from consumption-driven sectors and e-commerce logistic service providers, especially for LCVs and ICVs. Given these considerations, ICRA expects the domestic CV industry to likely register a growth of 6-8% in FY 2018.
LCVs: Swift recovery
The impact of demonetisation was also felt on the LCV (Trucks) given the high proportion of First Time Buyers (FTBs), Small Fleet Operators (SFOs) and dependence on rural markets. Accordingly, ICRA had moderated the growth expectation for the segment to 6-8% for FY 2017 from 11-12% earlier. Nevertheless, ICRA believes that the LCV segment is on a structural uptrend and would witness swift recovery once the liquidity situation improves. In the near-term, replacement-led demand (following almost three years of declining sales) and expectation of stronger demand from consumption-driven sectors and E-commerce focused logistic companies would remain key growth drivers for the segment. Over the medium-term, the segment would also benefit from rollout of GST and its impact on logistics sector and preference for hub-n-spoke model. Accordingly, ICRA expects the LCV (Truck) segment to register a growth of 11-13% over the medium-term.
Buses: Stable demand
In contrast to the previous year, the bus segment has witnessed lower growth (i.e. 5-7% in 11m FY 2017). It is believe that this is primarily on account of lower deliveries to SRTUs (during H1 FY 2017) on account of delays by states in submitting progress report to the Central Government for release of funds. Apart from SRTU segment, the segment also benefitted from stable demand from travel operators that cater to corporate travellers as well as from online aggregators.
In ICRA’s view, the domestic bus segment is likely to register a growth of 5-7% in FY 2018 in unit terms aided by expectations of stable demand from SRTU segment (backed GOI’s focus on improving urban as well as rural transportation and focus towards smart city initiatives). Over the past few years, the segment has also benefitted from healthy demand from online aggregators and staff carriers segment besides schools and colleges which remain a stable source of bus market in India. ICRA research indicates that fleet replacement cycle is gradually reducing with rising customer expectations for comfortable journey. This is likely to reduce average fleet age and spur replacement-led demand.
Product-focused investments
Despite marginal contraction in margins ICRA expects credit profile of CV OEMs to however remain stable in the near to medium term on back of relatively limited capital expenditure requirements. As industry’s capacity utilization levels remain around 50-55%, most OEMs are unlikely to invest in greenfield units over the next 2-3 years. This would mean that overall investments will be limited to a) new product development, b) addressing portfolio gaps and c) technology upgradation related to next level of emission norms. With an eye of growing international business, some of the OEMs are also contemplating setting-up assembly units overseas. ICRA estimates the CV OEMs will spend approximately Rs. 31-33 billion p.a. (on aggregate basis) over the medium-term in the aforementioned areas.
Exports: Positive medium-term
In contrast to relatively subdued growth in the domestic market, CV exports from India grew by 7% in 11m FY 2017 aided by expanding market coverage and healthy demand from some of the key export markets. This is despite the fact that demand from important market like Sri Lanka was impacted by restriction on financing norms for automobiles and hike in import duties. Moreover, macro-economic challenges and currency devaluation in select African markets also dampened demand.
While there have been near-term challenges, CV OEMs are gearing up for the long-haul and are gradually looking at expanding their market coverage in Asian, African and Middle Eastern countries. Historically, Indian OEMs have maintained strong hold in near-by markets of Sri Lanka, Bangladesh and Nepal but they have increased their focus on Middle East and African countries as well over the past few years. In addition, new product line-up and technology upgradation have now allowed them to enter relatively advance markets of South-East Asia.
ICRA believes that CV exports from India is likely to grow at a CAGR of 12-15% over the medium-term to touch sales of almost 160,000 units by FY 2020. This will be driven by a combination of expanding market coverage by Indian OEMs in new markets (i.e. ASEAN, Africa and Middle East), scale-up in exports from foreign CV OEMs and growing demand from some of the existing markets in the SAARC region. In order to compete more effectively with foreign OEMs, domestic players have also renewed their plans of setting up assembly operations in multiple markets, a strategy which had taken a back seat in the past few years.