INDIAN COMMERCIAL VEHICLE INDUSTRY - ICRA Research
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ICRA RESEARCH SERVICES
INDIAN COMMERCIAL VEHICLE INDUSTRY
Pickup in infrastructure activity to continue to support CV sales
Contacts:
Subrata Ray Shamsher Dewan Sruthi Thomas
+91 22 6169 3385 +91 124 4545 328 +91 124 4545 822
subrata@icraindia.com shamsherd@icraindia.com sruthi.thomas@icraindia.com
What’s Inside
1) Executive Summary
2) Update on Recent Industry Trends & Demand Drivers
3) Segment-Wise Commercial Vehicle Sales, Growth Drivers & Market Share Trends
❑ Medium & Heavy Commercial Vehicles (M&HCVs) Trucks
❑ Light Commercial Vehicles (LCV) Trucks
❑ Buses (Focus on SRTU segment)
4) ICRA’s Segment-wise Outlook for FY 2019
5) Financial Performance of Commercial Vehicle OEMs
6) Peer Comparison of Commercial Vehicle OEMs
7) ICRA Ratings in Commercial Vehicle Industry
8) Company Section – Performance of OEMs & Comments on Credit Profile
ICRA Limited P a g e |2
INDIAN COMMERCIAL VEHICLE INDUSTRY
Industry Performance Review
September 2018 ICRA RESEARCH SERVICES
Executive Summary
Domestic CV segment reports strong broad-based growth in 5m FY 2019
After a year of strong growth in domestic volumes in FY 2018, the Indian commercial vehicle industry continued its growth
trajectory during the current fiscal as well, with a robust 42% increase in domestic volumes during 5m FY2019 over the
corresponding previous. Although supported to some extent by the low base of the previous year when disruptions related to
Domestic CV industry commenced
implementation of GST and supply constraints post BS-IV implementation had impacted the sales volumes significantly, the growth
FY 2019 on strong footing with 42%
continues to be driven by the positive underlying momentum in the economy, especially recovery in infrastructure.
increase in volumes in 5m FY 2019,
albeit on a low base
Unlike the past three fiscals, the volume expansion in the current fiscal has been broad-based, with both truck and bus volumes
expanding during 5m FY 2019. Growth in the truck segment, especially the M&HCV segment, has been driven by the continued
pickup in demand from industrial and infrastructure projects, particularly roads, irrigation and affordable housing. This coupled
with consumption-led demand which is supporting demand for LCVs, there has been 45% growth in truck sales during 5m FY 2019.
Additionally, unlike FY 2018, the bus segment also contributed to growth, albeit on a low base, with 19% expansion in volumes.
Broad-based growth reported
Despite the sizeable capacity addition reported by the industry in the previous fiscal, and rising pressure on earnings of small fleet
during the period with M&HCV
operators due to rising fuel costs, ICRA expects the strong growth momentum to continue in the current fiscal, supported by the
(Trucks), LCV (Trucks) and buses all
pickup in infrastructure projects, improvement in industrial activity, and healthy demand from consumption-led sectors and the
contributing to growth
rural sector. Although the growth momentum over the near term would be impacted to some extent by transitionary uncertainties
related to revised axle load norm implementation, and pressure on earnings of small fleet owners would increase due to steadily
rising diesel prices, ICRA expects the demand momentum to continue over the current and next fiscals.
LCV (Trucks): LCV segment to benefit from shift towards hub-and-spoke model post GST implementation
After three years of subdued demand, the LCV (Truck) segment commenced its recovery trajectory from FY 2017 with 8% growth.
The growth picked up pace to 29% in FY 2018 and further to 36% in 5m FY 2019, driven by replacement-led demand, pick-up in
Ongoing replacement cycle and rural demand and increased requirement of small vehicles for last-mile logistics by e-commerce focused companies. Furthermore,
consumption-led demand to spur the financing environment has significantly improved over recent quarters, with stable delinquency levels, which has provided
growth in LCV (Truck) sales further impetus to LCV (Truck) sales. ICRA believes the segment is on a structural uptrend and the segment would grow between
18-20% in FY 2019. Over the medium-term, the segment would also benefit from roll-out of GST and its impact on logistics sector,
which includes an increasing preference for hub-and-spoke model of transportation.
ICRA Limited P a g e |3Executive Summary
M&HCV (Truck): Industry upcycle to continue till next fiscal
The M&HCV (Truck) segment started FY 2019 with robust growth of 62.5%, although on the low base of the corresponding
M&HCV (Trucks) grew by 62.5% in previous. Within M&HCV segment, ICV Trucks (7.5-12T) and HCVs (16.2T+) continued to be key growth drivers, with 75% and 67%
5m FY 2019, with broad based growth in volumes respectively during the period, while the MCV segment (12-16.2T) also expanded by 25%. Growth within the
growth across sub-segments HCV segment continued to be led by the 37T haulage trucks and Tractor Trailers, although the 25T truck category also reported
demand pickup. Over recent years, there has been increasing preference for bigger trucks for long-haul transportation and for
smaller vehicles for last-mile connectivity, with companies transitioning to the hub-and-spoke model of transportation, and this
is expected to continue going forward as well.
Supported by positive underlying factors like pent-up demand post GST implementation and industrial growth, the growth
momentum is expected to continue in FY 2019 as well, with M&HCV (trucks) expected to grow in the range of 18-20%. ICRA’s
channel check suggests that there has been healthy pickup in execution of infrastructure projects, particularly in the road, urban
Growth momentum to continue in infrastructure and affordable housing segments, which have bolstered demand for haulage trucks and tippers. Additionally,
FY 2019 supported by demand from sectors like auto carriers, 3PL players, cement, steel and oil tankers have also contributed to growth. Although
infrastructure-led demand growth prospects remain strong in the near-term supported by recovery in construction and industrial activity, the sharp rise in
diesel prices along with frequent increase in third-party insurance premiums, tyre and toll charges are likely to exert pressure on
earnings of fleet operators. In the past few months, freight rates have moved upwards to offset the impact of rising diesel prices,
the extent of pass-through would determine to a large extent its profitability. Apart from viability pressures, uncertainties and
confusions related to the recent revision in axle load norms would also have a near-term impact on CV sales.
ICRA also expects growth in the industry over the medium term to be supported by impending implementation of BS-VI emission
norms from April 2020 onwards. With prices of CVs expected to increase by 8-10% because of the changes in engines and after-
treatment systems to comply with the tighter emission standards, there is expected to be some pre-buying triggered in FY 2020,
augmenting CV sales volumes. Additionally, the Government’s proposed scrappage scheme and plans to phase out old diesel
vehicles also has potential to trigger replacement-led demand over the long term.
Buses: Replacement-led demand to spur growth in passenger carrier segment
After a period of subdued demand sentiment in FY 2018 due to lower order inflows from SRTUs, bus sales have picked up during
the current fiscal, albeit on a low base. Growth continued to be led by the 12T segment also recovered. ICRA expects volumes to
12-14% in FY 2019 on the back of
grow by 12-14% in FY 2019, aided by replacement-led demand post a year of slow-down. Over the medium term, the segment
ongoing replacement cycle
would continue to benefit from the Government’s focus on improving urban as well as rural transportation and initiatives such as
smart cities, in addition to healthy demand from relatively new segments like online aggregators and staff carriers. However, over
the medium term, uncertainties related to the new bus body code (norms applicable, availability of ARAI-approved workshops in
the country etc.) would also need to be cleared to realize the full potential.
ICRA Limited P a g e |4Executive Summary
Operating leverage benefits to offset impact of rising input costs; credit metrics likely to remain stable in
the near-term
ICRA expects revenues of the domestic CV industry to continue its growth trajectory in the current fiscal, supported by the positive
domestic demand momentum along with price revisions undertaken to incorporate the impact of commodity price hardening,
regulatory changes etc. Furthermore, some of the OEMs would also report higher growth in other business segments viz. defense
supplies and scale-up in new segments or markets.
Despite scale up in volumes, Profitability margins are however, expected to remain range bound between 8.5-9.5% range in the near-term because of rising
profitability indicators are likely to raw material prices and elevated discount levels owing to stiff competition. Additionally, there could be a lag in passing on the
remain range bound owing to rising increase in input costs due to commodity price hardening and regulatory changes to customers, further impacting profitability.
cost pressures On the investment front, while investments are expected to scale up as OEMs rise to meet BS-VI norms, the same is unlikely to
have material impact on credit metrics of CV OEMs.
Capital expenditure of CV OEMs to increase going forward on the back of investments for product
development and emission norm compliance
The recovery in domestic CV volumes over recent quarters augured well for improving the industry’s capacity utilization, which
increased to 57% in FY 2018. Going forward too, with demand momentum expected to continue in the domestic market and no
major capacity addition plans underway, this is likely to improve further to 64-71% by FY 2020. However, as capacity utilisation
levels are on an improving trend, select players have announced capacity addition plans, including VECV and ALL.
Capacity augmentation + new
product development + technology ICRA expects that, in addition to capacity augmentation, CV OEMs would invest in multiple avenues that would help them improve
upgradation to drive investment their business prospects. These include but are not restricted to a) new product development, b) addressing portfolio gaps, c)
requirements over medium term technology upgradation related to next level of emission norms and d) investments in sales network. Many OEMs are also
contemplating setting up their overseas assembly units with an eye to grow international business. Accordingly, CV OEMs are
expected to spend about Rs. 50-60 billion annually in the aforementioned areas.
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