CV Industry’s Outlook Remains Negative Given Macro-Economic Headwinds: ICRA

ICRA continues to maintain a Negative outlook for the commercial vehicle (CV) segment over the near-term, with headwinds continuing from all fronts, be it financing availability, macroeconomic environment, regulatory developments, or fleet operator health. The situation has been further aggravated by the rapid spread of novel coronavirus in India. Demand headwinds are expected to continue over the near-term given the macroeconomic challenges in view of the pandemic outbreak, coupled with weakening financial profile of fleet operators and significant price hikes because of transition to BS-VI emission norms. Additionally, the lockdowns imposed in the country from end of March 2020 have added production constraints to the on-going set of challenges.

The only limited green shoot visible is the uptick in rural demand, which augurs well for the LCV (Truck) segment, although ability to recoup lost sales of Q1 FY2021 remains to be seen. Accordingly, the domestic CV industry volumes are expected to contract further by 25-28% in FY2021, which would bring industry volumes to the lowest levels in more than a decade. Although ICRA believes growth would be optically better in FY2022 at 24-27%, the recovery to industry volumes of even FY2017 levels would remain some time away. Overall, these headwinds are expected to exert pressure on earnings and credit profile of CV OEMs, which have witnessed sharp earnings contraction over the past 4-5 quarters.

According to Shamsher Dewan, Vice President, ICRA, “In particular, the M&HCV (Truck) segment would continue to face significant demand contraction in FY2021. The challenges related to freight availability and stress on fleet operators have compounded significantly over the past 3-4 months on account of the pandemic outbreak and lockdown imposed to curtail it. Accordingly, notwithstanding the sharp contraction of 47% in FY2020, the segment volumes are expected to contract further by 35-40% during the current fiscal. Recovery over the medium-term hinges on macroeconomic revival, as well as pick up in construction and mining activity.”

The LCV (Truck) segment started facing headwinds from the macro-economic and consumption slowdown since the beginning of FY2020. Coupled with subdued demand from rural and allied sectors, and tight financing environment, besides inventory correction by OEMs, wholesale dispatches of LCV (Trucks) contracted by 21% during FY2020. Although volumes have contracted further by 78% during Q1 FY2021 on account of the lockdown, ICRA expects the segment to benefit from the uptick in rural demand sentiment and the increased requirements for last-mile transportation, especially from the e-commerce segment. Accordingly, the segment is expected to recoup some of the lost sales during the latter half of the fiscal, and close FY2021 with 17-20% de-growth. However, prolonged disruptions due to the coronavirus outbreak have the potential to negate this.

In the Passenger Carrier segment, despite some pre-buying trends witnessed during H2 FY2020, volumes contracted by 7% in FY2020, largely due to inventory correction undertaken in the first half, and the pandemic outbreak in March 2020. With stress on state finances due to the pandemic, ICRA expects limited demand from the state road transport undertakings (SRTU) segment in FY2021. Additionally, aversion to public transportation, and curtailed Capex by corporates and educational institutes are likely to impact demand from Staff Carrier, School/College and Bus Aggregator segments. Accordingly, volumes are expected to contract further by 35-40% in FY2021.

Adds Dewan, “Replacement demand for new trucks and buses is likely to remain muted over the near term, given pressure on cash flows of fleet operators. Sustained and meaningful pick-up in the economy and infrastructure projects remains critical for the industry fortunes to reverse.  In absence of either, we maintain a subdued outlook for the industry for the next fiscal.”

The sharp volume and revenue contraction and resultant negative operating leverage would exert significant pressure on the earnings and credit metrics of CV OEMs during the current fiscal, after a year of relatively subdued performance. These pressures are expected to continue at least over the next couple of quarters, before recovery sets in the industry. Accordingly, ICRA has a Negative outlook on the industry and on three out of five rated entities in the sector, given expectations of a weakening credit profile. For the other two rated entities, ICRA believes that their robust balance sheet and liquidity position would help tide over this phase, despite a temporary moderation in credit metrics.