Commercial vehicles get onto the expressway

Construction activity, replacement demand for higher tonnage spur growth; 2020 deadline for BS VI norms also adds to trend

In the April-June quarter of FY19, commercial vehicles (CV) sales grew 50% year-on-year indicating good times for truck makers.

The recent government notification enhancing the pay load of new trucks by 25% is expected to extend the good run.

Analysts attributed the surge in truck sales to a spurt in construction activity across the country that has led to heavy demand for tippers and transporters rushing to replace their existing trucks with more efficient and higher tonnage trucks for achieving economies of scale.

“Earlier, it was haulage and this year, tippers are driving growth,” said Vinod Agarwal, CEO and MD, VE Commercial Vehicles Ltd, a joint venture of Volvo and Eicher Motors.

“Because mining and road construction activity is high this year, there is more demand for tippers. Haulage is continuing because of migration towards high tonnage trucks and tractor trailers. These are more economical and better roads are helping,” he said.

If buyers earlier preferred 16-tonne or 25-tonne trucks, they are now moving goods with 31-tonne, 37-tonne or 41-tonne trucks. “So though new demand is there, replacement demand is driving the increased sales in the industry. Overloading is coming down… because of the migration towards higher tonnage and better trucks, the demand is growing,” he added.

‘Better economics’

On the impact of the recent government notification on truck manufacturers (OEMs) Hetal Gandhi, director, Crisil Research, said since new trucks provide transporters better operating economics as compared with existing fleets, they would want to avail benefits from the new norms by bringing forward their replacement demand.

“In the best years of CV sales, replacement demand has accounted for 60% or more of total volumes. Also, given that the BS VI norms will be implemented by April 2020, leading to an increase in vehicle prices, transporters would be more inclined to advance purchases in fiscal 2019 and fiscal 2020. It would also push people to take faster decision on expansion or fresh purchases,” she said.

Binaifer Jehani, who is also director at Crisil Research said BS IV implementation in April 2017 had led to major supply issues for the heavy commercial vehicle industry in Q1 of FY18. Hence, growth in Q1 of FY19 was on a low base.

“However, the underlying growth in freight demand continues to be strong. PMI manufacturing has reached 53.1 in June, 2018, its strongest since October 2016 [pre-demonetisation], signaling strong recovery in manufacturing. Given that the government is expediting key projects, construction activity is on an upswing. This, along with the overloading ban, has led to strong growth over the last 6-9 months,” she said.

In a recent note, Motilal Oswal Research said the demand outlook for FY19 seems healthy across segments.

“We expect 8-10% growth for commercial vehicles. Key threats to demand are posed by inflationary fuel prices and higher interest rates. While we expect margins to improve, competitive intensity and commodity inflation could have an impact,” it said.

Short-term impact

Sudeep Mehrotra, senior director, corporate solutions, Alvarez & Marsal, said as a result of the recent notification, the sales for OEMs would be impacted in the short term but would improve in the next few quarters. “Around 50% of total fleet population in India is of large tonnage,” Mr. Mehrotra said. “Of this, around 40% of the vehicles carry cargo which are dependent on weight, not volume. Demand for this category of vehicles which carry bulk cargo like minerals, grains and metals is expected to come down in the near future due to higher capacity per vehicle,” Mr. Mehrotra said.

But in the medium term, auto OEMs will benefit, he said. “The cost efficiencies of vehicles due to age is more significant in larger vehicles than smaller vehicles. This is expected to result in improvement of sales for OEMs in the next few quarters as transporters will opt for newer fleet which can now handle even higher loads and retire the old fleet to capture maximum benefits due to this cost efficiency,” he added.

The proposed scrapping policy is also expected to help in boosting demand. With this year’s monsoon expected to be normal, consumption and construction will drive growth, analysts said.

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