Gearing Up For The Future
No industry mimics the health OF THE economy as closely as the automotive sector, especially the commercial vehicles (CV) segment. And with a slowdown gripping the Indian economy over the past two years, it is hardly surprising that the CV industry, which until 2018 was booming with India as the world's third largest market and the fastest-growing globally, has slid into its worst recession in a decade.
From selling more than a million units and boasting a market size of $14 billion in FY19, CV sales in the country fell to 13,027 units in March 2020. The impending lockdown further hit sales. In March 2019, the corresponding figures were 1,09,022 units, according to SIAM (Society of Indian Automobile Manufacturers) data. In FY20, CV sales fell by 28.75 per cent to 7,17,688 units, from 10,07,311 units in FY19.
"Now, when we stepped into 2020, we all thought the market will be 10 per cent lower than last year mainly because we were switching to BS-VI emission norms from 1 April. But now the dip will be much more as we are facing three storms i.e. cyclical, structural and transformational and the fourth storm is Covid which comes on top of it ensuring all these storms will be severe in magnitude," says Satyakam Arya, Managing Director & CEO at Daimler India Commercial Vehicles (DICV).
He adds: "So, what do we expect for (calendar year) 2020? Frankly, this year we expect 50-60 per cent lower sales than last year. This will be a bottom."
SCENARIO SUPER GRIM
Fortigo (4TiGO) Logistics, a Bangalore-based startup which offers fleet management services to over 25,000 truck operators countrywide on its platform, used to generate 36,000 trips per annum from nearly 200,000 trucks. But this financial year, the firm is doing 30 per cent lesser number of trips with these truck operators. The reasons specifically stated by its platform users are absence of immediate return loads matching their truck types, payment delinquency by several of the medium enterprises, and reduced viability in running the trucks.
"The number of fleet owners on our network has gone up a bit from pre-Covid days. However, fleet utilisation is estimated to be an overall 50 per cent of pre-Covid levels.
Truck availability due to a combination of trucks kept idle purposely and actual reduced fleet ownership has resulted in a drop of 25-30 per cent," reveals Anjani Mandal, Founder, Fortigo Logistics.
Mandal's views reflect the sombre atmosphere in the entire CV industry, which is currently under severe stress. While the introduction of axle load norms, economic slowdown coupled with BS-VI transition were the major reasons in FY20, the Covid pandemic and the ensuing lockdown dealt a severe blow to the sector in H1 of FY21.
The challenges plaguing the CV sector such as overcapacity in the trucking system, subdued freight demand due to a weak macroeconomic environment, financing constraints, and stress on the cash flows of fleet operators have all exacerbated with the onset of the pandemic, and the lockdowns imposed to contain the same.
According to SIAM data, total CV sales fell 57.04 per cent during April-September 2020 on a YoY basis at 176,490 units. Out of that, domestic share was 165,160 units, witnessing a massive drop of 56.01 per cent compared to the same period last year. Further, ICRA says fleet operators have put new vehicle purchases on the backburner, as is evident from the 85 per cent and 55 per cent contraction in overall CV retail volumes in Q1 and Q2 of FY21 respectively.
Shamsher Dewan, Vice President, ICRA states, "In particular, the M&HCV (truck) segment would continue to face significant demand contraction in FY2021. The challenges related to freight availability and stress on fleet operators have compounded significantly over the past 3-4 months on account of the pandemic and lockdown imposed to contain it. Accordingly, notwithstanding the sharp contraction of 47 per cent in FY2020, the segment volumes are expected to contract further by 35-40 per cent during the current fiscal. Recovery over the medium-term hinges on macroeconomic revival as well as pickup in construction and mining activity."
To gauge the trends at the ground level, ICRA conducted a detailed survey of 26 CV dealers located across 11 states in October 2020. Despite sequential improvement, the current demand environment remains overall muted, as challenges abound in the system. An overwhelming 85 per cent of the dealers indicated that sales volumes continued to contract till September 2020. The outlook for Q3 FY21 also remains muted, despite the expectation of sequential improvement. Nearly 73 per cent of the survey respondents indicated to a further YoY contraction during the quarter, despite the low base of the previous year.
"Replacement demand for new trucks and buses is likely to stay muted in the near term, given pressure on cash flows of fleet operators. Sustained pick-up in the economy and infrastructure projects remains critical for the industry fortunes to reverse. In the absence of either, we maintain a subdued outlook for the industry for the next fiscal," adds Dewan.
ICRA also maintains a negative outlook for the CV sector, anticipating a volume contraction of 25-28 per cent in FY21, which would bring industry volumes down to the lowest levels in more than a decade. Within the industry, M&HCV (truck) sales are likely to witness a contraction of 35-40 per cent in unit terms, while LCV (truck) sales will shrink by 13- 17 per cent. Comparatively, it will be a tough road ahead for buses with a 50-55 per cent decline.
PRODUCT ROLLOUT ON TRACK
This year has been an extraordinary one in so far as the automotive industry has leapfrogged from BS-IV to BS-VI emission norms right at the onset of the pandemic. Despite the ongoing market blues, all the industry players have successfully transitioned their entire range of vehicles. Furthermore, most of them have kept their investment plans on track.
Tata Motors, the market leader in the CV segment, rolled out a series of products such as Signa 4825.TK (truck), 5525.S 4x2 prime mover (tractor), Ultra Range ILCV trucks, petrolpowered Ace and revamped version of Winger this year.
Girish Wagh, President, Commercial Vehicle Business Unit, Tata Motors maintains, "With the BS-VI transition, Tata Motors has not only upgraded to the latest emission norms but has used this opportunity to improve overall revenue potential, productivity as well as enhancing safety and comfort for the customer, while lowering the total cost of operations. Along with upgrading the portfolio, we also launched all-new products across key segments."
For Ashok Leyland, the proposed capex for FY21 was Rs 750 crore, of which Rs 270 crore has been spent till the September quarter, as per the company. Some of the new products and technologies launched by the Chennai-based company this year are AVTR (new range of modular BS-VI trucks), Bada Dost (LCV), Boss LX and LE trucks and DigitAL Nxt (i-Alert 3.0, AL Cares and Uptime Solution Centre).
"Even though the pandemic hindered the business cycle, we continued to focus on innovation through the introduction of path-breaking new products. Both the AVTR and the Bada Dost, which have been launched this year, are receiving an exceptional response from our customers on performance. Both of them are packaged for LHD (left-hand drive) and RHD (right-hand drive) which will enable us to continue with our thrust on international operations in accordance with our vision to be in the top 10 CV makers in the world," says Vipin Sondhi, CEO & MD, Ashok Leyland.
Apart from rolling out a new bus, Skyline Pro 6016, VE Commercial Vehicles (VECV) is offering 100 per cent connected vehicles across its entire product portfolio, powered by its connected vehicle solution - Eicher Live.
Vinod Aggarwal, MD & CEO, VECV says: "The unique proposition of connected vehicles is a significant step towards modernising the CV industry. Starting with Eicher Live, then the uptime centre and now with 100 per cent connected vehicles, we are closing the loop on providing a connected ecosystem for tomorrow, which is driven by the BS-VI wave."
DEMAND PICK-UP SEEN
As the country started unlocking itself, there was a gradual increase in economic activity, which along with a robust rural economy, resulted in demand improvement in small, intermediate and light CVs mainly due to the increased ecommerce activity. While I&LCVs have had a major role in hub-to-hub and hub-to-spoke goods transportation, the SCV segment has grown considerably on the strength of high volume of goods movement for the last-mile delivery.
Ashok Leyland's Sondhi affirms, "While it is difficult to put a timeline for a resurgence in the economy but with the expansion of e-commerce, last-mile delivery, and rural economy we are seeing some green shoots in demand for our LCVs, ICVs and tippers. As normalcy is gradually returning with all due Covid protocols in place we are witnessing an increase in the movement of people and goods so we are expecting the demand to pick up in the coming quarters not only in the auto sector but other sectors as well."
Aggarwal of VECV maintains, "If you compare the GDP on a YoY basis, Q1 was 24 per cent down, Q2 is expected to be little bit down, Q3 will be little bit down, but we are expecting the fourth quarter to grow. So based on these estimates, the economy as a whole may be down about 8-10 per cent. With that scenario, you will always see better results for the CV sector, since it is linked to the economy and the economy is doing better now. Therefore, we are very optimistic for the CV sector as we move forward."
Echoes Wagh, "Increased activity in last-mile applications like FMCG, agriculture, milk and supplies of other e-commerce products have been major catalysts for the surge. The M&HCV tipper trucks segment started growing with the resumption of construction projects as well as commencement of impending projects. The newer projects in the irrigation, water resources and coal, iron ore and minerals sectors have also had a big role in the rise in demand for tippers."
"The transportation sector indicators like the e-way bills and diesel consumption have both been higher this October compared to October 2019 thus showing positive and promising signs. The increasing service workshop utilisation is another indicator of increased transportation activity in the recent months," Wagh adds.
GST CUT & SCRAPPAGE POLICY
While there is an uptick in demand, industry players reckon that absolute recovery would be contingent on factors such as scrappage programme and GST cuts. A VECV official says the government loses more vis-à-vis industry players as tax collections on products sold are hitting rock bottom. He also believes that incremental volumes via fleet modernisation programmes can only be generated if there are more cash flows in the hands of consumers.
"The (current) GST rate is 28 per cent and the government loses that on every unit not sold. Whereas the company's profit margin is 5-7 per cent, I think the stakes of the government are much larger than the stakes of the industry. And indirectly, it contributes to the economic growth as the CV industry is the backbone of the economy," says Aggarwal. "We are absolutely confident that the government will take the right steps which will help the industry and the economy," he adds.
With regard to the scrappage policy, Aggarwal states, "We have been trying to convince the government that it is going to be helpful only when it is incentive-based. Since it is going to be voluntary and not mandatory, you have to create the right cash flows in the hands of the customers who are replacing 15-year-old trucks. And this will be generated from three sources including from the government in terms of lower duties, the scrap sales value and the additional discount which will come from the manufacturer. Furthermore, since there are additional sales, it will mean more revenues despite lower duties on these products. So, the ball now is in the government's court."
Ashok Leyland's Sondhi says, "An immediate trigger for the CV industry would be well regarded had the government considered a few suggestions that the industry made through SIAM. For example, we have talked about the scrappage policy. We have asked for - at least for a limited term - the reduction of GST from 28 per cent to 18 per cent."
Daimler India's Arya says, "We should not even call it a scrappage policy. We should call it an end-of-life vehicle policy and a mechanism to deal with that. This means we should have authorised scrap centres which actually use the principle of recycle and reuse. It can be used to generate demand depending on the economic circumstances during a certain period. The more important thing is to scrap a vehicle when its life has ended. Also, we should have a robust IT mechanism so that the vehicles which are scrapped have their registration cancelled. In the current situation, we should have proper incentivisation and a tradable mechanism of the certificate or the incentive which could then trigger demand in the CV industry."
LONG-TERM OUTLOOK ROSY
Even as the domestic sales of CVs is likely to be the lowest ever in a decade in FY21, industry leaders expect better days in the second half of the fiscal. Some industry players maintain that things should improve from the fourth quarter of FY21 and that industry should come back on track by FY22. ICRA maintains that even though growth would be optically better in FY22 at 24-27 per cent, the return to industry volumes at even FY2017 levels would still remain some time away.
"I expect 2021 onwards, there will be a sharp rebound which means we can grow in double digit percentages by 40 per cent. I expect India to recover sooner and better than other countries," Arya of Daimler India says.
As Kavan Mukhtyar, Partner & Leader, Automotive, PwC India puts it, "We expect the economy to recover to pre-Covid levels by the second half of FY22. Given the close overall correlation of the CV industry with the economic activity levels, this segment is expected to see a full recovery to FY19 levels only from FY23. However, a faster recovery of the NBFC sector, acceleration in the infrastructure and construction activity in the country, and introduction of scrappage policy have the potential to bring a faster resurgence for the sector."
Industry analysts reckon that over the coming two to three years, growth in CV sales are highly likely owing to resumption of infrastructure projects and increase in transportation of non-essential goods, stopped during the lockdown. Some analysts also believe that with the implementation of the fleet modernisation programme, the demand for commercial vehicles could witness a further surge in the years ahead.
