Commercial Vehicle Domestic Demand Likely to Recover in Near-Term: ICRA

India is positioned as the largest three-wheeler industry with large domestic market and export base 

With industry volumes of ~940,000 units in FY 2015, India is positioned as the largest manufacturer as well as market for three wheelers (3W), globally. Over the past decade (i.e. FY 2006-15), the Indian 3W industry has witnessed a CAGR of 8.9% in unit sales, driven by steadily rising exports as well as domestic demand. The domestic 3W market stood at 532,000 units in FY 2015 and has registered a CAGR of 4.4% over the past ten years. In contrast, exports of 3Ws have grown at much higher pace (i.e. 20.4%) during the same period. As a result, the share of exports in 3W industry volumes has risen from 18% (in FY 2006) to almost 43% (in 10m FY 2016). 

This trend has been supported primarily by two factors viz. (a) strong demand from international markets on back of rising demand for last-mile connectivity (owing to lack of well developed public transport system) in emerging markets in Africa and South-East Asia, and (b) declining trend in demand for 3W goods carriers in the domestic market due to competition from Small Commercial Vehicles (SCVs). 

Passenger variant of three-wheeler industry accounts for bulk of industry sales 

With annual sales volumes of 432,000 units in FY 2015, the passenger carrier segment accounts for almost 80% of domestic 3W industry sales. Accordingly, the growth drivers of domestic 3W industry are majorly influenced by factors that drive demand for passenger 3Ws. Over the past decade (i.e. FY 2006-15), the passenger carrier segment has witnessed a CAGR of 8.2% driven by: (a) increasing demand for last-mile connectivity in metros & major cities, (b) improving penetration in tier III/IV towns and rural areas, and (c) gradually increasing availability of funding through organized channel. In urban markets, replacement demand has also been an important growth driver where in improving network of CNG fuel stations is driving replacement of older petrol or diesel powered 3Ws with ones based on CNG. 

Cargo variants face tough competition from small CVs but certain attributes support their sales 

With annual volumes of ~100,000 units in FY 2015, the goods carrier segment accounted for almost one-fifth of domestic 3W sales. Unlike the passenger segment, which has grown steadily over the past decade, the demand for goods carriers has actually declined by 4.2% over the same period. This trend has been driven by the acceptance of 'Mini Trucks/SCVs' (with payload capacity of less than 2T) over 3-wheelers as preferred alternative for providing last mile transportation. 

India’s 3-wheeler exports have grown at a CAGR of 20% over the past decade 

With export sales of over ~410,000 units in FY 2015, India ranks amongst the leading exporter of 3Ws, globally. Over the past decade (i.e. FY 2016-15), India’s 3W exports have grown at a CAGR of 20.4% (in unit sales) driven by a confluence of factors including (a) rising demand for last-mile transportation from developing countries with relatively under-developed public transport system and (b) growing focus of Indian OEMs markets within South Asia, Africa and Latin America. 

While countries such as Sri Lanka, Bangladesh (within South Asia), followed by Middle East & Africa account for majority (i.e. ~90%) of exports from India, Indian OEMs have also ventured into the relatively developed markets in the ASEAN and Latin American regions over the past few years. Accordingly, the strong growth for Indian OEMs in the international markets has also been driven by geographic expansion besides suitability of their product portfolio in EMs, their competitive cost structure and expansion in sales-cum-service network. Bajaj Auto continues to be the largest 3W exporter from India, contributing 70% to the total sales.

Macro-economic headwinds impact near-term prospects 

While opportunities to grow in international markets remain abundant, in the recent past, the industry has also witnessed some headwinds. For instance, in FY 2013, 3W exports from India declined by a sharp 16% on y-o-y basis on back of sharp hike in import duties by Sri Lanka (one of the key export destinations), currency fluctuation and reduction in export incentives. Likewise 3W exports to Egypt also declined for a brief period, when it imposed an import-ban between Feb-July 2014 owing to safety related concerns. At present, the demand environment is influenced by macro-economic headwinds and challenges on the currency front in some of the emerging markets. Given the fact the local currencies in many of these markets have depreciated more than the INR, India’s exports have become relatively less competitive.

Bajaj Auto dominates the 3-wheeler industry

The Indian 3W industry is fairly consolidated with top-3 players contributing 87.3% to industry sales in 10m FY2016. Bajaj Auto has been the industry pioneer and has remained the market leader with 46.4% share in the domestic market in 10m FY2016. The company is particularly strong in the 0.35T segment of passenger carrier segment with dominant share in petrol and alternate fuel segment. As on March 2015, the company had 88% share of the petrol and alternate fuel segment and 61% in the small diesel segment. Over the years, Bajaj Auto has also improved its market share in the large diesel segment. After Bajaj Auto, Piaggio is the second-largest player with a market share 30.4% (in 10m FY2016).

Piaggio has presence in both the passenger as well as goods carrier segment of the industry. While it is positioned as the 2nd largest player in passenger carriers, it dominates the goods carrier segment with market share of 54.1% (in 10m FY 2016).

Competition is increasing, especially in large diesel segment 

Although Bajaj Auto and Piaggio remain leading OEMs, some of the regional players have been steadily gaining market share on back of their expanding portfolio and distribution reach. The competition has risen particularly in the large diesel passenger segment as many of the unorganized players use common aggregates, which are readily available from select component manufacturers. For instance, most of the new entrants in the large diesel passenger 3W segment have a common 436cc diesel engine, which is sourced from Greaves Cotton. Likewise, many of the other key components like transmission, axles, etc. are sourced from common vendors. Accordingly, ready availability of common aggregates has created low entry barriers, thereby limiting the overall scope of manufacturing to assembly operations. 

In addition, given the cost conscious nature of end-customers, having a wide spread service network is also not a compelling requirement for new players in the 3W segment as most of the customers/3W owners usually rely on road-side workshops. 

Industry growth is likely to recover in FY 2017 driven by domestic demand 

After registering a growth of 10.8% in volume terms during FY 2015, the demand for 3W has been on a declining trend since the beginning of the current fiscal year (i.e. down 2.9% in 10m FY 2016). This trend has primarily been due to lack of fresh permits being issued by various Road Transport Authorities (RTAs) unlike in the previous year when fresh permits were issued by states such as Delhi, Maharashtra, Hyderabad and Chandigarh. As a result of these factors, the passenger variant of domestic 3W industry declined by 2.4% in 10m FY 2016. The goods carrier segment has also witnessed a contraction of 5.5% during the same period amid overcapacity in the SCV segment and cautious approach followed by financing institutions in lending to First-Time Buyers (FTBs). 

Despite near-term headwinds, ICRA’s expects the domestic volumes to recover in the near-term on back of expectation of fresh permits by some of the key states like Maharashtra in Q4 FY 2016. Accordingly, 3W volumes are expected to recover and grow by 8-10% in the domestic market in FY 2017e. 

During the current fiscal, 3W exports from India have grown by 3.0% to 360,000 units (in 10m FY 2016). While the financial year had begun with strong double digit growth, the adverse impact of weak macro-economic environment in some of key export market started resulting in lower export volumes from October 2015. Thus, given the tight liquidity scenario, we expect 3W exports to remain subdued in the near-term. However, over the medium-term, the segment is likely to register healthy growth on back of structurally favourable growth drivers and improving distribution reach.

Outlook on CV sector has improved gradually

•M&HCV Trucks - The outlook on CV industry has improved gradually since H2 FY 2015 driven by improving viability for fleet operators, replacement-led demand (following two years of capacity deferral by fleet operators) and pre-buying ahead of implementation of BS-IV emission norms and Anti-Lock Braking Systems (ABS). As a result, the M&HCV (Truck) segment has registered a growth of 31.7% in 10m FY 2016 and would continue to benefit from these factors in the near-term. The growth prospects could improve further, if the impact of ongoing reforms in the infrastructure and mining sectors percolates down to ground level. Although demand for road logistics hasn’t improved meaningfully over the past few quarters, the reduction in diesel prices has come as a relief for the industry, which was reeling under pressure of steadily rising operating costs and weak pricing 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. Accordingly, we expect M&HCV (Truck) sales to register a growth of 13-15% in FY 2017e. 

•LCV Trucks - The demand is likely to pickup in FY 2017 on back of expectation of replacement-led demand (i.e. three years of declining sales), some pre-buying ahead of the implementation of BS-IV norms (by April 2017) and gradual improvement in viability on back of lower diesel prices (SCV freight rates remain relatively sticky) and pick-up in consumption-driven sectors. In contrast to a decline of 2-4% in FY 2016e, the segment is likely to witness a growth of ~10% in FY 2017e. 

•Buses - With overall recovery and new orders placed by SRTUs (under the JNNURM programme), we expect the overall bus segment to register a growth of 10-12% during FY17. 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. Apart from existing order, the domestic bus sales are also likely to benefit from (a) Government’s recent proposal of opening up the passenger transport sector to private players, (b) higher allocation towards urban development projects, and other initiatives such as “Smart Cities”, etc.




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