ICRA: Domestic CV Industry Victim Of Economic Slowdown & Over-capacity

The Indian commercial vehicles industry has been facing a slowdown in demand and declining sales over the past two-three quarters primarily due to the economic slowdown and surplus capacity that it is saddled with. According to an ICRA note, this has been contributed in no small measure by other evolving factors such as GST implementation, E-way bill implementation, upward revision in axle norms and declining viability of small fleet operators.

ICRA’s channel check with transport companies pan-India indicates that the implementation of unified tax regime, Goods and Services Tax (GST) from July 1, 2017, significantly impacted fleet owners’ operations and was positive. With the new tax regime doing away with the requirement of state-level VAT check posts, it resulted in faster Turn Around Time (TAT) for trucks and thereby efficiencies. Further, increased compliance requirements are triggering a gradual shift towards organized players. Says Shamsher Dewan, Vice President & Sector Head - Corporate Ratings, ICRA, “As per our estimates, there has been about 15-20% improvement in turnaround time because of GST. The impact has been more pronounced in a few states such as Kerala, West Bengal, Maharashtra, Madhya Pradesh and Bihar, which were earlier known for high waiting time spent at their inter-state borders.”

Another factor has been the implementation of the E-way bill which has also streamlined operations to some extent for the transporter community, with savings in time and paperwork reduction due to the digitization of processes. While this has been a positive for the truck operator, the resultant efficiency gain has contributed to an increase in capacity for the existing CV parc, leading to lower demand for new trucks.

ICRA notes that the sharp slowdown in CV demand over the past 2-3 quarters has also been due to revision in axle load norms, tight liquidity situation within the financing ecosystem as well as overall economic slowdown resulting in lower freight availability. The upward revision in axle load norms for Trucks (above 16T GVW), w.e.f. effect from July 2018, resulted in almost 15-20% increase in load-carrying capacity of fleet operators and exerted pressure on freight rates. Thus, despite the rise in operating cost for fleet operators on back of higher fuel cost, EMIs and other overheads, the freight rates had remained flat till September 2018 and started declining from November 2018 onwards owing to low freight availability and surplus capacity, in addition to the softening of fuel prices.

Adds Mr. Dewan, “Given the subdued freight rates, low freight availability and increased operating costs, the viability of fleet operators have come under pressure over recent quarters, which has also contributed to lower demand for CVs. ICRA expects that small fleet operators (SFOs) have borne the brunt of the pressure, while the performance of larger organized fleet operators indicates expansion in volumes, thereby implying a loss for smaller operators. This has also been driven partially by the implementation of GST and E-way bill, wherein smaller operators found it more difficult to pass on the increased compliance costs to its customers.”