Commercial vehicle (CV) sales, a key indicator of economic activity, will remain under pressure in near future as the industry is yet to recover from numerous hurdles it faced in the last one year.
Rating agency ICRA said domestic CV Industry volumes are likely to contract by 10-12 per cent during fiscal 2020, which coupled with elevated level of discounts offered by OEMs, will exert pressure on earnings and credit metrics of CV original equipment manufacturers (OEMs) in the near-term.
The slowdown in the domestic commercial vehicle industry, which started from the latter half of FY19, has accentuated during the current fiscal, with volumes contracting by a sharp 19 per cent during FY20 (April-August 2019) on a YoY basis.
The volume contraction has worsened as the year progressed with CV OEMs cutting down on their wholesale dispatches by 33 per cent during July-August 2019 (vis-a-vis 10 per cent contraction in Q1 FY20), to pare down inventory levels at dealerships, in light of subdued footfalls and retail sales. Early sales data released by CV OEMs shows the situation has further worsened in September with volumes halving over the year-ago period.
India’s largest CV maker Tata Motors’ CV sales fell 45.4 per cent to 28,079 units as compared to 51,419 units in September last year.
“With the ongoing subdued demand, we continued our focus on system stock correction by driving retail and aligning production. Retail sales are estimated to be ahead of wholesale by over 16 per cent in September and over 27 per cent in Q2, reducing the overall stock level to the lowest for the last six quarters,” a company executive said. Similarly, second largest CV player Ashok Leyland reported a 57 per cent drop in domestic vehicle sales in September to 7,851 units.
Share price fell 6.68 per cent intraday on BSE to Rs 63.55 on Monday after the auto firm announced non-working days in October.
“To align production in line with our sales, the company’s plants at various locations will be observing non-working days ranging from 2-15 days during October,” Ashok Leyland said.
The slowdown has been particularly sharp in the M&HCV (Truck) segment, wherein volumes contracted by 32 per cent during FY20. Shamsher Dewan, vice-president, ICRA Ratings, said, “The truck segment has been impacted by the double-whammy of excess capacity along with subdued freight availability, which has suppressed freight rates and kept profitability of fleet operators under pressure.
Coupled with tight liquidity in the NBFC space, and expectations of a GST rate cut, fleet operators had deferred their vehicle purchases in the current scenario.”
ICRA’s outlook on the domestic CV sector is Negative considering the sharp correction in vehicle sales amid slowing economic growth, overcapacity in the CV parc and tight financing environment. ICRA believes that demand headwinds would continue in the near-term with the likelihood of limited pre-buying ahead of the roll-out of BS-VI emission norms.