Commercial vehicle industry going through one of its longest down cycles

The domestic CV industry to close 2014-15 at 636,000 units, reflecting de-growth of 19.7% over the prior year, says ICRA in its latest update on Commercial Vehicle Industry.

mahindra-trucksAccording to ICRA estimates, the CV industry volumes in the current year would be lower than industry size in 2010-11. However, the sales volumes in the M&HCV segment would actually be lower than what they were in 2004-05. Thus, given the low base and some replacement demand owing to ageing existing fleet, ICRA expects M&HCV sales to start showing some recovery from H2 2014-15 onwards.

Overall, a meaningful recovery in M&HCV volumes remains dependant on pick-up in economic activity post Elections in May 2014. The bus segment could grow at a faster pace as it will start seeing benefits of the budgetary allocation towards JNNURM with specific plan to add 10,000 buses. In ICRA’s view, the proposed order will be spread over the next two years and contribute significantly (~8%) to M&HCV bus sales in each of the next two years.

The domestic commercial vehicle (CV) industry is currently going through one of its longest down cycles in recent periods. Having witnessed a decline of 2% in 2012-13, the industry volumes have contracted by a sharp 19.7% in 11m 2013-14.

The impact of slowing economy and weak consumer sentiment has also had a trickle down impact on the demand for LCVs, which shrunk by 16.6% during 11m 2013-14. Unlike the previous slowdown, the subdued demand appears to be uniform across segments of the industry, says ICRA in the report.

The Light Commercial Vehicle (LCV) segment had also been in the grip of a sharp slowdown since the beginning of 2013-14. After having achieved a CAGR of 27% over the past five years (FY09-13), the segment’s volume de-grew by 16.6% in 11m 2013-14. The impact of slowing economy and weak consumer sentiment has also had a trickle down impact on LCVs apart from steady growth that the segment has witnessed over the past several years. As the slowdown in LCVs has been a recent phenomenon unlike M&HCVs, ICRA expects further contraction in the near-term. However, driven by certain structurally favorable factor, the segment’s growth prospects over the medium-term remain intact.

The market share trends visible in FY13 has seen bit of a reversal in 11m FY14 with Tata Motors gaining back market share in the M&HCV segment while losing close to 890 bps in the LCV segment. Such fluctuations in market share over the short-term usually reflect the impact of each OEM’s strategy with regards to discounts, trend in inventory levels and response to new model introductions. In the LCV segment, an increasing preference for 2-3.5t vehicles (predominantly Pick-Up Trucks) also explains the reasons for market share traction in favour of Mahindra & Mahindra given its strong product portfolio of Pick-Up trucks.

Despite muted environment, OEMs have sizeable new model introduction plans over the near-term. As some of the new entrants expand their product portfolio, sales network and also established a brand loyalty in the minds of the trucking community, the competitive intensity is set to rise.

The profitability indicators of CV OEMs have been on a declining trend since the beginning of 2012-13 owing to sharp drop in CV sales and consistently rising discount levels prevailing in the market. According to ICRA estimates, while EBITDA margins of CV OEMs dropped by almost 300 bps to 8.4% in 2012-13, the extent of drop has been sharper during the current year, as reflected by losses at EBITDA level for some players. Given the ongoing slowdown, OEMs have also taken marginal price increase over the quarters and implemented several measures to curtail costs by rationalizing manpower and other overheads. However, these measures have not helped to a great extent as discount levels continue to remain at elevated level. Further, capacity utilization of CV OEMs has fallen sharply for second consecutive year.

ICRA believe that even as growth momentum in the domestic CV industry may start improving from H2 2014-15 onwards, the profitability indicators of CV OEMs are unlikely to follow a similar trend in view of a) restricted bargaining power in wake of competition, b) likely increase in expenses related to new model launches and c) pressures on employee costs as several OEMs have announced substantial wage hikes. Accordingly, a relatively strong recovery in M&HCVs sales will be critical for industry’s earning trajectory to improve going forward.