Sustained Recovery Challenge For Commercial Vehicle Industry

Despite a drop in sales over the recent quarters, a spike in incremental capacity additions of medium and heavy commercial vehicles (MHCVs) since July 2016 is expected to increase the System Capacity (SC) and elevate deployment risk in the medium term, says India Ratings and Research (Ind-Ra). If an aggressive selling strategy is adopted by the financiers through attractive financing options, it may create inorganic demand in the Commercial Vehicle Industry, resulting in overcapacity in the system and eventually leading to higher delinquencies.

Ind-Ra calculated SC multiple of 1.6x as on August 2016 is unlikely to return to its ideal level of 1.4x in the near term, despite witnessing correction over the months from 1.85x in June 2013. Ind-Ra believes that a structural shift towards higher tonnage MHCVs will continue, especially after the roll-out of GST.

Ind-Ra developed an index known as the SC multiplier to study the sensitivity of system capacity and Index of Industrial Production (IIP) on delinquencies. The SC multiplier estimates an expected movement of delinquencies based on the movement in the system capacity and IIP growth. Higher the multiple, higher would be the delinquencies. Delinquencies of less than 2% in August 2016 corresponds to the SC multiple of 1.6x. Ind-Ra believes the multiple is expected to move upwards in the medium term, resulting in an expected rise in delinquencies.

A steep reduction in MHCV sales and higher replacement demand in FY14 and FY15 has led to limited new additions, thus correcting excess capacity and improving CV capacity utilisation. This has corrected delinquencies to less than 2% in August 2016 from 4% in October 2015. However, a relatively lower replacement demand in 2HFY16 and FY17 has resulted in an increase in new additions, despite lower sales in the recent quarters. However, if the incremental capacity build-up is not supported by the corresponding growth in the industrial activity, it may result in higher delinquencies.

Ind-Ra believes the structural shift towards higher tonnage MHCVs will continue. Sales data indicates that the proportion of MHCVs over 25 tonne has increased manifold (56% in 1HFY17 from 19% in FY10). Furthermore, roll-out of GST is expected to further boost the demand for high tonnage vehicles, as large scale intrastate good transport will become cost effective and hassle-free. This, however, exposes the industry to elevated deployment risk, if industrial activity registers disappointing growth. Moreover, deployment of heavy tonnage MHCVs will also be a constraint due to high fixed cost associated with it.


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About the Author

Kartik Shetty
Analyst – Credit & Market Research, India Ratings & Research