M&HCV (Truck) Segment is Likely to Grow by 12-14% in FY 2016: ICRA

Domestic Industry Size & Structure

With market size of ~614,000 unit sales in FY 2015, the Indian Commercial Vehicle (CV) industry ranks among the top-six markets for commercial vehicles, globally. With nearly 233,000 Medium & Heavy Commercial Vehicles (M&HCVs) sold annually, it is also one of the top-four heavy-duty truck markets worldwide. Although at a distant position to the world’s largest CV market – China, the total number of M&HCVs sold in India stand higher than those in some of the developed markets such as Europe (246,000 units), Japan (40,000 units) and even United States (249,000 units). In value terms (Rs. 75,000 crore), the Indian CV industry is the second-largest contributor to India’s Rs. 350,000 crore automobile industry following passenger vehicles, which contribute nearly 50% to industry size.

Over the past 10 years (FY06-15), the CV industry has grown at a CAGR (%) of 4.6% aided by buoyant economy, investments in road & highway infrastructure, benign financing environment and introduction of advanced vehicle platforms by Original Equipment Manufacturers (OEMs), especially in the heavy-duty segment. Besides these factors, a strong consumption driven demand and proliferation of “hub-n-spoke” model have also paved the way for strong demand for light duty trucks that are suited for providing last mile connectivity. Over the years, the gradual implementation of stricter emission norms (from BS II to BS IV) and regulatory ban on overloading of vehicles, especially on long-haulage routes has also led to strong growth in heavy-duty vehicles.

Based on vehicle’s load carrying capacity, the CV industry can be broadly categorized in two segments - M&HCVs and Light Commercial Vehicles (LCVs). In India, vehicles with Gross Vehicle Weight (GVW) less than 7.5T are classified as LCVs, while higher tonnage vehicles are categorized under M&HCVs (7.5-49T). These segments can be classified further into various sub-segments based on their applications. For instance, the heavy-duty truck segment (16.2T+) includes Multi-Axle Vehicles (MAVs), Tractor Trailers and Tippers, while LCVs in India are dominated by Small Commercial Vehicles (SCVs, <2T) and Pick-Up trucks. In FY 2015, the LCV segment accounted for 62% of total industry volumes, while M&HCV contributed to the rest. Over the past decade, the proportion of LCVs has expanded from 38% in FY 2004 to 68% in FY 2014 (i.e. 62% in FY 2015).

This trend has been supported largely by increasing demand for last-mile connectivity, stricter norms for entry of HCVs within city limits and more importantly with the wide-spread acceptance for SCVs following the introduction of ‘Tata Ace’, a 1T truck by Tata Motors in FY 2006. Within the M&HCV truck segment, the share of HCVs (16T+) has also risen from 36% in FY 2004 to 64% in FY 2015 on back of superior economics offered to fleet operators, improved highway infrastructure and new model introduction by OEMs, targeted at specific applications. The CV industry can also be divided in terms of goods and passenger segment vehicles. In India, nearly 90% of CVs sold are trucks, while buses (both light & medium segment) contribute approximately 13% to industry size.

Industry Characteristics & Growth Trends

The prospects of CV industry are closely linked to country’s GDP growth, investment environment and infrastructure development. The CV industry in India, as is this case globally, is also highly cyclical with periods of up-cycles followed by sharp downturn and instance of overcapacity. As economy starts growing at faster pace, bargaining power of fleet operators improves, which leads to higher freight rates and incentives for fleet operators to add capacity. Generally, capacity addition tends to be higher than underlying demand, which creates overcapacity in the system and subsequently impacts fleet operator’s earnings during periods of slowdown.

Following the impact of global financial crisis in FY 2009, the Indian CV industry recovered sharply over the next two years, experiencing growth of 30%+ in each of the following two years (i.e. FY 2010 and FY 2011). Besides economy recovery, easing of interest rates and Government backed stimulus packages triggered recovery in the industry. To boost demand for new vehicles, the excise duty on CVs was also rationalized by the Government on two occasions. In addition, the benefits of accelerated depreciation for fleet operators and JNNURM supported investments in new buses particularly added to the overall demand. The change in emission norms from BS III to BS IV (in top 13 cities) from April 2010 and later across the country from October 2010 (from BS II to BS III) also triggered replacement demand for a brief period. However, after experiencing steady growth for couple of years, the buoyancy in domestic CV industry started deteriorating from March 2012 onwards. While in FY 2012, the growth slowed down to 18.2%, it entered into the negative territory in FY 2013 (down 2.0% YoY) and weakened further in FY 2014 (down 20.2% YoY) on back of weakening economy and surplus capacity in the trucking system.

From fleet operator’s perspective, the down cycle was characterized by rising operating costs owing to gradually increasing diesel prices, which coupled with low cargo availability, have put pressure on their cash flows. After two years of down cycle, the domestic Commercial Vehicle (CV) industry started witnessing signs of recovery from FY 2015 onwards. Although industry volumes contracted marginally by 2.8% during the fiscal but the pace of decline came down considerably on back of replacement-led demand, favourable pricing owing to excise duty cut and continuation of discounts by OEMs.

Within the CV space, the improvement was driven by sharp recovery in M&HCV (Truck) sales, which albeit on lowbase, benefitted from replacement-led demand by large fleet operators. In contrast, the LCV Truck segment however continued to struggle owing to surplus capacity and challenging financing environment amidst rising NPA levels. The third segment of the CV Industry viz. buses also started witnessing recovery in sales from Q3 FY 2015 onwards on back of JNNURM backed order by State Road Transport Undertakings (SRTUs). Overall, bus sales grew by 0.2% during FY 2015 in comparison to a decline of 14% in FY 2014. The industry also witnessed an uptick in export sales (up 11.3% YoY), as demand from near-by markets, especially Sri Lanka, Bangladesh and parts of Middle East and Africa improved. Moreover, domestic OEMs also benefitted from their increasing focus on expanding market coverage and new model launches.

With sharp cut in diesel prices (14% since September 2014) and gradually improving macro-economic environment, the operating environment for CV demand has started turning favourable. This is reflected by stable freight rates (despite reduction in diesel prices) and gradually improving cash flows of fleet operators. Our channel check with a wide spectrum of fleet operators suggest that although demand for road logistics hasn’t improved meaningfully over the past 6-9 months, the reduction of diesel prices has come as a relief for the industry, which was reeling under pressure of steadily rising operating costs and weak bargaining power (amidst surplus capacity in the trucking system). The improvement in cash flows of fleet operators has also started showing up in improved collection efficiency for CV financiers, who expect that further deterioration in asset quality indicators is unlikely. Notwithstanding these trends, the sector also continues to face some challenges, primarily linked to subdued pick-up in infrastructure and mining activities, weak re-sale values of used trucks and relatively cautious financing environment, especially for Small Fleet Operators (SFOs) and First Time Buyers (FTBs).

Segment-Wise Volume Trends & Growth Prospects

M&HCV (Truck) Segment

After witnessing sharp contraction in sales between FY 2013-14, the M&HCV (Truck) segment of the domestic CV segment registered a growth of 21% in sales volumes during FY 2015. Despite subdued trend in industrial activity and weak demand scenario, the pick-up in M&HCV sales was driven by replacement-led demand by large fleet operators and gradually improving viability for fleet operators in view of declining diesel prices. In addition, the growth in the segment was also supported by reduction in excise duty rates by 4% (for brief period) and continued discounting by OEMs.

Within the M&HCV truck segment, the Heavy Commercial Vehicles (HCVs), which contribute nearly 64% to industry sales, grew at the highest pace (up 43% in FY 2015) on back of low-base (i.e. segment volumes contracted by almost 50% during FY 2013-14) and strong traction in the Multi-Axle (MAVs) and Tractor Trailer segment. While in the initial few months of the fiscal, the recovery was primarily visible in HCVs, however, in the past 3-4 months, the ICV (7.5-12T) and MCV (12-16.2T) has also started witnessing pick-up in demand. Overall, while the ICV segment declined by 9.4%, the MCV segment registered a marginal growth of 1.3% during FY 2015.

Going forward, the M&HCV (Truck) segment is expected to register a growth of 12-14% in FY 2016 driven by continuing trend of replacement of ageing fleet and expectations of pick-up in demand from infrastructure and industrial sectors in view of reforms being initiated by the Government. In our view, some of the key measures that are likely to translate into higher demand for CVs include – a) roadmap for steadily scaling-up coal production, b) relaxation of norms for environmental clearance for road projects, c) efforts to restore confidence of private sector in infrastructure projects, and d) faster clearance of projects (through the Project Monitoring group).

Over the near-to-medium term, the CV industry could also derive higher demand owing to gradual acceptance of advance trucking platforms by OEMs, progression to BS-IV emission norms and mandatory introduction of technologies such as Anti-Lock Braking System (ABS), which will increase vehicle prices. Any road maps for regulatory norms may also lead to some advance purchases by fleet operators.

LCV (Truck) Segment

In contrast to the M&HCV (Truck) segment, the demand for LCV trucks continued to remain weak during FY 2015 amidst surplus capacity issues and tight financing environment on back of rising delinquency levels. The segment, which continued to witness strong traction till FY 2013 has been in the grips of slowdown for the past couple of years with sales declining by 18.3% and 13.4% in FY 2014 and FY 2015, respectively. As a result, the industry volumes have contracted by almost 30% from its peak of 480,000 units per annum in FY 2013. The decline in LCV sales have been led by sharp contraction in SCVs were financing plays a critical role, which has dried down owing to sharp rise in delinquencies. Accordingly, financiers have tightened the lending norms, reduce the Loan-To-Value (LTV) ratio and shifted focus on collections rather than disbursals.

That apart from tight financing environment, rural slowdown and sizeable overcapacity in the segment has also led to lower demand for SCVs. For example, between FY 2009-2013, the sales of LCV (trucks) had grown at a CAGR of 29%, outpacing the growth in the M&HCV (truck) segment by a sizeable margin and supported largely by the increasing acceptance of a new range of vehicles launched in sub-3.5T segment. As a result of this robust growth, the population of LCVs plying on Indian road has almost doubled over the past five years, while its average age has dropped from almost ~6.5 years (in early 2000s) to a low ~5 years (in FY 2015). During this period, the ratio of LCV (Trucks) to M&HCV (Trucks) has also improved quite significantly from 1.2x (in FY 2009) to 2.4x (in FY 2014). Although it continues to remain below the global average (i.e. 4-6x,) but the pace of improvement was fairly sharp.

These factors are likely to continue in the near-term and improvement in outlook will depend to a great extent on pick-up in macro-economic scenario. We expect the LCV (truck) to witness a modest recovery (i.e. 4-6%) in FY 2016 on back of economic recovery, improving viability (due to decline in diesel prices) and replacement demand to some extent.

Bus Segment

In contrast to FY 2014, the bus sales also improved during FY 2015, registering a marginal growth of 0.2% vis-à-vis a decline of 14.0% in the previous year. While the segment continued to witness weak trend in the first half of the fiscal, it witnessed gradual recovery from H2 onwards partially on back of new bus deliveries to SRTUs (as part of the JNNURM II programme) and overall macro improvement. Within the bus segment, the recovery was led by pick-up in LCV and ICV segments, up 4.7% and 6.4%, respectively, while the M&HCV segment witnessed a drop of 13.9% (but expanded by 10.8% during H2 FY 2015).

Within the overall bus segment, the demand for mid-segment buses (i.e. ICVs with 20-30 seating capacity) remained relatively steady (up 6.2%) given the fact that majority of the demand for mid-segment buses comes from relatively stable customer segments such as schools, colleges and corporate travelers. Moreover, the segment also offers better profitability to bus operators owing to a) concessional taxation (results in lower initial investment), relatively stable and higher capacity utilization and ability to adjust the increase in fuel cost through increased rates.

With overall recovery and new orders placed by SRTUs (under the JNNURM programme), we expect the overall bus segment to register a growth of 8% - 10% during FY 2016. Within the segments, the M&HCV segment is likely to outperform on account of JNNURM orders, revival in demand from Private Carriers (that contribute almost 1/3rd to M&HCV bus sales) and low-base effect. During FY 2015, the two major OEMs – Tata Motors and Ashok Leyland collectively received orders for supplying 6,700 buses from various SRTUs (which translates into ~30% of M&HCV segment volumes). Accordingly, M&HCV Bus segment is likely to grow by 8%-10% during FY 2016.

Competitive Landscape – Commercial Vehicles

The competitive intensity in the domestic CV industry has increased over the past five years as new OEMs have entered the market while existing players have ventured into new segments and expanded their sales-cum-service network. For instance, some of the recent entrants in the M&HCV space like VECV (JV between Volvo & Eicher), Bharat Benz (Indian unit of Daimler) and M&M together now account for ~17% of M&HCV segment in India.

Accordingly, market share of Tata Motors has declined by almost 5% over the past five years; while that of Ashok Leyland improved in FY 2015 on back of its expanding presence in Non-South markets. While competition in the M&HCV space has come largely from foreign OEMs, in the LCV space, M&M and Force Motors have been the key players who have gained share on the back of increasing acceptability of Pick-Up Trucks and ‘Traveler’ range of buses, respectively. Overall, while competition from OEMs like VECV and Bharat Benz is likely to get formidable, the strong brand equity of incumbents with fleet operators, well-established product portfolio and wide spread servicing network would make market traction for new players more gradual.

In the LCV segment, competitive intensity is likely to increase as new OEMs are expected to enter the segment over the near-to-medium term. While some of them are established OEMs with deep understanding of the Indian market, others have significant presence globally in the LCV space and experience of operating in markets similar to India. In addition, we believe that entry barriers in the LCV space are relatively less stringent (in contrast to M&HCVs) as having a wide spread service network is not so much of a compelling requirement, as their span of commute is limited to localised area. Secondly, sizeable proportion of LCV buyers generally tend to be First-Time Buyers (FTBs), which are easier to tap into vis-à-vis large fleet operators, who tend to have higher brand loyalty towards incumbent players.

The Indian CV industry is also witnessing sizeable investments by OEMs towards upgrading their product portfolio, introducing new models and expanding manufacturing capacities. These investments are likely to allow some of the new players in strengthening their positioning in the market.

Outlook

M&HCV Segment

The M&HCV (Truck) segment is likely to register a growth of 12-14% in FY 2016 driven by continuing trend towards replacement of ageing fleet, improvement in operating economics of fleet operators and some pre-buying ahead of mandatory introduction of Anti-Lock Braking System (ABS) from October 2014. In the near-term, CV sales will also benefit from gradual progression is expected to BS-IV emission norms (All India coverage by April 2017.

LCV Segment

Unlike M&HCVs, the LCV segment is expected to remain subdued in FY 2016 (down 2-4%), as segment’s prospects continue to be influenced by overcapacity issues and constrained financing environment amidst rising delinquencies. Nevertheless, driven by certain structurally favourable factors, the segment’s growth prospects over the medium-term remain intact. Some of the factors that are likely to support steady demand for LCVs going forward include a) further proliferation of “Hub-n-Spoke” logistics model with the implementation of GST, b) relatively untapped potential in semi-urban and rural areas, and c) improving urbanization levels.

Bus Segment

With new orders placed by SRTUs (under the JNNURM programme), the overall bus segment is likely to register a growth of 8% - 10% during FY 2016. Within the segments, the M&HCV segment is likely to outperform on account of JNNURM orders, revival in demand from Private Carriers (that contribute almost 1/3rd to M&HCV Bus Sales) and low-base effect.

Medium-Term Outlook

Over the medium-term (i.e. FY 2016-2020), the M&HCV segment is expected to grow at a CAGR of 9.5-11.5% driven by increasing demand for road logistics on back of economic expansion and investments in the infrastructure space. For the LCV segment, although the outlook remains muted in the near-term, driven by certain structurally favourable factors, the segment’s growth prospects over the medium-term remain intact. Some of the factors that are likely to support steady demand for LCVs going forward include a) further proliferation of “Hub-n-Spoke” logistics model with the implementation of GST, b) relatively untapped potential in semi-urban and rural areas and c) improving urbanization levels. ICRA expect the segment to register a growth of 11-13% over the medium-term.

 

 

 

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