ICRA expectations from Indian commercial vehicle industry

Indian commercial vehicle industry is reporting CV sales recovery and improved earnings. ICRA expects credit profile of CV OEMs to improve in the months to come owing to higher internal cash flow generation, and considerably limited capital expenditure needs.

Indian commercial vehicle industry
Indian commercial vehicle industry outlook

ICRA points CV OEMs’ credit profile varies largely as some have sizeable debt, and some maintain healthy cash balances. Tata Motors has sizeable debt (at a standalone entity level) but its credit profile derives benefits from holdings in Jaguar Land Rover (JLR). Strong refinancing capabilities and position within the Tata Group act in its favour.

Ashok Leyland has initiated measures to reduce debt burden by raising cash from equity dilution, divestment of non-core investments and scaling back capital expenditure plans. VECV and SML Isuzu maintain strong credit profile owing to staggered investments and healthy cash reserves.

ICRA estimates EBITDA margins are improved by about 180 bps to 3.6 pct (in 9m FY 2015) over 1.8 pct (in FY 2014). Recovery in M&HCV segment, CV players margins are likely to be better in FY 2016 over the last few years. Improvement margins see a boost as OEMs are increasing focus on exports volumes. Indian commercial vehicle industry exports are up 14.7 pct in 10m FY 2015 (PY 3.7 pct decline).

ICRA believes industry performance improvement is relative to continued high discounts offered, increase in expenses related to new model launches, inflationary pressures attributed to rising manpower costs. Substantial growth in M&HCV sales is critical for industry’s earning trajectory.

Competition in the Indian commercial vehicle industry has increased in the last five years. New OEMs have entered space, and existing manufacturers have expanded segment offerings and sales-cum-service network. VECV (JV between Volvo and Eicher), BharatBenz (Indian unit of Daimler) and Mahindra together account for 17 pct of of M&HCV segment in India.

Yesterday Volvo said it sold 1.27 million shares in Indian auto firm Eicher Motors for about 2.5 billion Swedish crowns ($301.59 million) . Proceeds would be used to boost its core business. Previously Volvo owned 8.4 pct share of Eicher Motors. Following stake sale, Volvo now holds about 3.7 pct shares in Eicher Motors. Volvo no longer needed to hold Eicher Motor shares for accounting purposes as was required when the JV was set up in 2008.

Tata Motors market share has declined by 4.5 pct in the last four years. Ashok Leyland remained relatively stable (25-26 pct). M&HCV space activity is increased owing largely to foreign OEMs. In LCV space, Mahindra and Force Motors are key players, having gained share through Pick-Up Trucks and Traveler range of buses, respectively.

Mahindra reports farm equipment domestic sales in February 2015 at 10,267 units (PY 16,553 ­­units), equating to 38 pct decline. Total tractor sales (domestic + exports) during February 2015 stood at 11,437 units (PY 17,593 units) to report 35 pct decline. Exports last month stood at 1,170 ­­­­units (PY 1040), equating to 13 pct growth.

Rajesh Jejurikar, Chief Executive, Farm Equipment and Two Wheeler Division, Mahindra and Mahindra Ltd. says negative sentiments and low crop output during this period saw industry witness de-growth. Mahindra Tractors sees a positive trend in exports during February 2015.

In February 2015, Mahindra Truck and Bus division sold 731 units (PY 605 units) registering 21 pct growth. Pravin Shah, Chief Executive, Automotive Division, Mahindra and Mahindra Ltd. said the company us happy with performance in Exports and HCV segment where good growth is reported. 4-wheelers Commercial (Passenger & Load) segment reports 11928 units sold (PY 14701 units) equating to 18.86 pct decline. 3-wheeler sales stood at 4156 units (PY 4724 units) equating to 12.02 pct sales decline.

Tata motors reports domestic market commercial vehicle sales in February 2015 at 26,547 units (PY 23,990 units), up 11 pct. LCV sales were at 14,357 units (PY 14,881 units) at a decline of 4 pct. M&HCV sales stood at 12,190 nos. (PY 9,109 nos) up 34 pct.

Cumulative domestic Indian commercial vehicle industry sales for the fiscal was 286,263 units (PY 344,992 units), lower by 17 pct. Cumulative LCV sales was 174,083 nos (PY 247,179 nos) at 30 pct decline. M&HCV sales were 112,180 units (PY 97,813 units) up 15 pct.

ICRA views VECV and BharatBenz to be formidable competitors. At the same time, company’s with strong brand equity and fleet operators, well-established product portfolio and expansive servicing network will challenge new players to improve market share, especially in HCV segment. BharatBenz sold 10,300 vehicles (PY 6,500 units) in 2014, up 59 pct.

LCV segment competitive intensity is likely to increase with 2-3 new players are expected to make an entry in the near-to-medium term. The fight for dominance will be between OEMs with deep understanding of the Indian market and those with global presnece in LCV space and experience of operating in markets similar to India.

Indian commercial vehicle industry LCV segments present less stringent barriers as against M&HCVs segments for entrants. A wide service network is not a deciding factor in LCV space as commute is limited to local area. A number of LCV buyers tend to be First-Time Buyers (FTBs). The represent an easy to tap buyer pool compared to large fleet operators who exhibit higher brand loyalty towards brands. Indian CV industry is receiving sizeable investment by OEMs working to upgrade product portfolio, introduce new models and expand manufacturing capacity. Such investments are likely to to let some new players strengthen their market position.

ICRA foresees M&HCV (Truck) segment registering 12-14 pct growth in FY 2016. Growth drivers are continued trend towards replacing ageing fleet and expected growth in demand owing to infrastructure and industrial sector development based on reforms initiated by the Government. Over medium term, demand for new CVs will receive a boost through gradual acceptance of advance trucking platforms. Adapting BS-V emission norms, (possibly 2017 onwards) and new tech, such as Anti-Lock Braking System (ABS) may lead to advance purchases by fleet operators.

Indian commercial vehicle industry LCV segment growth is foreseen as modest at 4-6 pct in FY 2016. Segment prospects are influenced by overcapacity issues, and constrained financing environment amid rising delinquencies. Owing to structural reforms, LCV segment medium-term growth prospects are intact. Demand would be fuelled by demand growth in ‘Hub-n-Spoke’ models. Implementation of GST will have a positive effect. Opportunities in semi-urban and rural areas and improved urbanisation levels foster growth. Small commercial vehicles (SCVs) offer attractive employment opportunities for FTBs. An established financing market will support demand for LCVs. Demand for LCVs is forseen at CAGR 11-13 pct over the longer-term.

Following a two year down cycle, some domestic Commercial Vehicle (CV) industry segments have shown signs of recovery in FY 2015. In the first ten months of the fiscal, domestic CV sales decline reduced to 4.6 pct compared to 20.2 pct decline through FY 2014. Medium and Heavy Commercial Vehicle (M&HCV) Truck segment has posted 19.0 pct growth in 10m FY 2015. HCV (16T+) segment, which accounts for almost half of total M&HCV (Truck) sales report strong growth (up 42.6% in 10m FY 2015) owing to replacement demand (following two years of deferment), and capacity addition by organised fleet operator.

While M&HCV truck segment seems to have bottomed out, LCV truck segment reflects sluggish movement (down 13.8 pct YoY). Indian commercial vehicle industry bus segment contributes nearly 13 pct to industry sales, and has reported improvement from Q3 FY15 onwards owing to State Road Transport Undertakings (SRTUs) placing orders for new buses as part of JNNURM II programme.

Fleet operators opine the market has stabilised the past 6-9 months owing to drop in diesel price, and relatively sound freight rates pointing to improvement in cash flow. Though asset quality indicators deteriorated till Q3 FY 2015, most financiers don’t expect a further drop. Demand for tippers is likely to remain subdued.