Aditya Kondejkar, Senior Research Analyst – India, PSR Power Systems Research India Private Limited offers insights into how the CV industry is shaping up and the trends that it will follow in the coming months
MHCV production, which is a reflection of the country’s overall economic health, is continuing its growth trend. We are witnessing a steady recovery from the demand side of the segment as fleet utilization levels are reaching historic high values. Utilization levels are moving north, owing to the government’s aggressive spending on infrastructure and road construction projects. This continues to support the surge in demand for the tractor-trailers and tippers segment. The key demand drivers for the segment are the government’s huge investment and increasing focus on road construction activity across the country, a resurgence of mining operations, and anticipated growth in the agriculture industry.
The light commercial vehicle (LCV) segment recovered relatively earlier than the MHCV segment. The increasing penetration of e-commerce business and last-mile connectivity in applications like FMCG/FMCD agriculture supplies spurred the LCV segment. The segment should continue to see sustained demand owing to internet penetration and e-commerce adaptability in Tier 2 and 3 cities across the country. The recovery of the CV industry post-pandemic is invigorating as the entire ecosystem has suffered a lot in the past couple of years. After witnessing a bumper year in 2018, the industry faced the heat due to revised axle load norms, over-capacity of vehicles, BS-VI transitions, liquidity crunch, and the pandemic and supply chain disruption.
All these factors led to a massive increase in commodity prices and an almost double-digit increase in vehicle prices. Stoking the fire further, the demand fell more than 25% compared to the previous peak. As a result, CV volume dropped sharply, and we witnessed historic low production volumes in CY2020. However, the Indian economy managed to revive itself during the 1st and 2nd COVID wave and quickly achieved a V-shaped recovery. In the current year, GST is touching new highs. GST collection has witnessed a growth of 26% YoY – YTD CY22. Furthermore, the generation of e-way bills is increasing rapidly. The generation of e-way bills is directly proportional to truck utilization and will propel the vehicle demand.
The goods carrier segment performance is closely aligned with the country’s GDP – which can be tracked from GST collection, and the way in which the macro-economic situation is improving, the industry sentiments seem to be very much positive. This will be reflected in the overall CV production in the months and quarters ahead. Since the industry has gone through a downturn, we see several different trends in the industry from all the stakeholders.
Changing Product Mix
Post pandemic, we have witnessed a reshuffling of the product mix of the MHCV segment. The passenger segment was impacted due to travel restrictions. However, we have seen a strong performance of class 8 trucks (which account for approximately 50% of the MHCV segment). This demand is driven by the privatization of coal mines and aggressive government spending on infrastructure. The government has announced the National Infrastructure Pipeline (NIP) worth more than Rs 100 lakh crores until FY24 and a 25% on-year increase in the capex allocation for FY22.
This will hold up the class 8 upward trajectory in the short to medium term. As a result, we are witnessing the market leaders – Tata Motors and Ashok Leyland – launching new trucks in the heavy vehicles category, especially 40+ tons. Also, Ashok Leyland has increased its SOB by leveraging this change in the product mix. The company is focusing on the tipper segment. It is the fastest-growing segment in the M&HCV industry, as it directly benefits from the rapidly growing infrastructure of the country.
Impact of Alternative Fuels
Since the recovery from the pandemic, CNG vehicles’ share in the CV industry has triggered on the bank of roaring diesel prices. Besides, the initial price difference between similar diesel and CNG-powered vehicles has decreased post BS-VI transition. The government is also pushing for new CNG stations in Tier 2 and 3 cities, thus taking away fleet owners’ fuel station non-availability concerns (to some extent). Moreover, many state governments are giving exemptions on green tax or cess, further driving sales. However, this fuel option is not viable for long-haul trucks because of restrictions on the gas-carrying cylinders.
This is where Liquefied Natural Gas (LNG) is emerging as the alternative fuel solution for long-haul trucks. LNG fuel has several other advantages–diesel engines can easily be retrofitted for LNG, the lower environmental impact reduces fuel bills for operators by about 25%, and the import bill for the country is about 35% less than diesel. Finally, it takes about 30% of the space of CNG, and will go up to about 600 km in one full tank. Hence, it is suitable for long haul trucks.
Like CNG station infrastructure, the government is also working on the LNG station infrastructure. In the initial stage, it is targeting the strategic, golden quadrilateral route. Also, the government plans to incentivize the manufacturing of LNG-based heavy vehicles and ancillary vehicles through green certifications and tax exemptions. We believe the electrification of medium and heavy trucks will take a long time, and the conversion of CNG and LNG will take place in the short and medium term. However, passenger vehicles and LCVs will see a rapid move to electrification.
Truck Utilization and Freight Rates
As all the sectors of the economy are seeing momentum, the truck utilization levels are breaking records. Truck utilization has continuously remained above the last year’s levels. Improving demand from the core sectors like infrastructure, mining, steel, and cement is anticipated to provide the much-needed thrust for the CV industry. In the past few months, fuel prices have remained stable, while freight rates improved significantly. As a result, operators are seeing an increase in profitability. These positive sentiments will drive the new purchases.
We expect a favourable business environment in the current year despite ongoing semiconductor shortages, which is the biggest hurdle in catering to the enhanced demand. From 2020 the CV industry lost volumes because of pandemic-related disruptions and delayed replacement demand. CV industry’s channel inventory is stressed due to the miss-match in supply and demand. The channel inventory has been low, at about 10 days against an average of 4-5 weeks. We hope that this year the supply chain situation will continue to improve without disruptions. Also, the semiconductor shortage situation might start easing out. Hence, we believe the CV industry will continue its growth until the general election that is scheduled in 2024. We might see a post-election dip in 2024, but the industry is not expected to face severe headwinds and will equal 2018 volumes in 2027.