ICRA: CV Sales To Remain Subdued In Current Fiscal

The slowdown in the domestic commercial vehicle industry, which started from the latter half of FY2019, has accentuated during the current fiscal, with volumes contracting by a sharp 19% during YTD FY2020 (April-August 2019) on a YoY basis. The volume contraction has worsened as the year progressed with CV OEMs cutting down on their wholesale dispatches by 33% during July-August 2019 (vis-à-vis 10% contraction in Q1 FY2020), to pare down inventory levels at dealerships, in light of subdued footfalls and retail sales. As per early sales data released by key listed CV OEMs, the situation has further worsened in September 2019 with volumes halving over the year-ago period.

The slowdown has been particularly sharp in the M&HCV (Truck) segment, wherein volumes contracted by 32% during YTD FY2020. According to Shamsher Dewan, Vice President, ICRA Ratings, “The M&HCV (Truck) segment has been impacted by the double-whammy of excess capacity along with subdued freight availability, which has suppressed freight rates and kept the profitability of fleet operators under pressure. Coupled with tight liquidity in the NBFC space, and expectations of a GST rate cut, fleet operators had deferred their vehicle purchases in the current scenario.”

The sector is currently facing over-capacity, partially contributed by the revision in axle-load norms from July 2018 and partially by GST and E-way bill implementation and the resultant improvement in turnaround time. At the same time, slowing economic growth and subdued infrastructure activity have limited freight availability.

On sectoral lines, the slowdown in automobile sales, in general, has led to the sharp reduction in demand for car carriers (i.e. tractor-trailers), while delayed payments to contractors and the resultant slowdown in infrastructure project execution, has also put brakes on Tipper sales. Even the LCV (Truck) segment, which was relatively insulated from the impact of revised axle load norms has been impacted over recent months with the weakness in consumption-oriented sectors and subdued rural demand sentiment.

ICRA’s outlook on the domestic CV sector is Negative considering the sharp correction in vehicle sales amid slowing economic growth, overcapacity in the CV parc and tight financing environment.

“Given the high inventory levels at dealerships and subdued retail sales, OEMs are focusing on rationalizing the inventory in the system prior to the roll-out of new emission norms, which would render unsold inventory of existing BS-IV vehicles as obsolete. Hence, wholesales dispatches are not expected to increase materially over the latter half of the fiscal,” added Dewan.

ICRA believes that demand headwinds would continue in the near-term with likelihood of limited pre-buying ahead of the roll-out of BS-VI emission norms. Accordingly, domestic CV Industry volumes are likely to contract by 10-12% during FY2020 which coupled with an elevated level of discounts offered by OEMs, will exert pressure on earnings and credit metrics of CV OEMs in the near-term.