Increased thrust on infrastructure and rural sectors in the Union Budget 2017-18, potential implementation of fleet modernization or the scrappage program, and higher demand from consumption-driven sectors and e-commerce logistic service providers will lead India’s commercial vehicle (CV) industry to grow at around 6-8 per cent in the current financial year, according to a report by credit rating agency Icra Ltd.
The rating agency, however, said the CV demand would be relatively subdued in the early part of FY18 as a result of pre-buying due to new emission norms (BS-IV).
“Moreover, with possible implementation of the Goods and Services Tax, fleet operators are likely to put their investment plans on hold, while OEMs (original equipment manufacturers) would also prefer to align their production and inventory levels to the new taxation regime,” the report said.
The CV industry has been hit hard by the Supreme Court’s decision to ban sale of BS-III compliant vehicles with effect from April 1, 2017. The order is estimated to have cost OEMs Rs.2,500 crore, including the steep discounts they have had to offer in the last three days of March to clear as much inventory as possible.
“The discounts and incentives on vehicles sold till March 31, 2017 are expected to have cost CV manufacturers about Rs.1,200 crore. An additional cost of Rs.1,300 crore would be incurred to dispose of the unsold inventory,” rating agency Crisil Ltd said.
At the time of the SC ruling, dealers had an inventory pile-up of around 97,000 BS-III compliant units, valued at Rs.11,600 crore. Manufacturers have at least 40,000-45,000 units of unsold inventory even now.
As per reports, Tata Motors Ltd owns at least half of that inventory while the rest is shared between Ashok Leyland Ltd, VE Commercial Vehicles Ltd and Mahindra & Mahindra Ltd. The inventory of Tata Motors is believed to cost around Rs.2500 crore while that of Ashok Leyland is expected to be at around Rs.750 crore.
Export is the way outDespite macro-economic challenges in select African markets, restriction on financing norms for automobiles and hike in import duties in Sri Lanka, India’s CV exports grew by 7 per cent in FY 2017.
OEMs are gradually looking at expanding their market coverage in Asian, African and Middle Eastern countries, the report said.
Historically, Indian OEMs have maintained a stronghold in Sri Lanka, Bangladesh and Nepal but have increased their focus on West Asia and Africa as well over the past few years.
New product development, addressing portfolio gaps, technology upgradation and an eye on international market will drive investment in the CV industry, Icra said.
“With an eye on growing international businesses, some of the OEMs are also contemplating setting-up assembly units overseas. Icra estimates OEMs to spend approximately Rs.31-33 billion p.a. (on aggregate basis) over the medium-term,” the report said.
Replacement-led demand, weak cargo availability from industrial sectors and uncertainty related to effective taxation on the industry under GST is likely to bring down the growth rate from 11.5 per cent in FY16 to 5-6 per cent in FY17, Icra said.
“The domestic CV volumes took a further hit after November 2016 when the government’s demonetisation move put a check on the operations of road logistics sector which depends heavily on cash transactions, the report said.
BW Reporters
The author is Senior Correspondent with BW Businessworld
