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Cycles always turn, but nobody is now hazarding a guess as to when India’s cyclical businesses will turn. The commercial vehicle segment, which hit the slow lane some years ago, is unlikely to turn another three years, claim analysts.
Despite hopes of a pick-up in mining and agriculture, any meaningful revival in demand is some way off. Channel checks done by analysts indicate that truck operators remains negative.
Profitability of truck has remained subdued for several quarters now and despite a slight blip in a stray quarter, the sentiment remains weak. This is preventing operators from even replacing existing vehicles.
The standstill in the mining business and slowing economic growth has dragged truck utilization levels to a 10-year low of 65%. Capacity utilization in the medium and heavy commercial vehicle segment is 38% and may recover to 50% only by FY16.
Also, Kotak Institutional Equities says road freight demand is set to grow at 7% CAGR for the next few years. Given the capacity and low utilization levels, fleet operators may not add new trucks in the near future. Most analysts believe that the commercial vehicles segment is unlikely to report a pick-up in volumes for the next three years.
Analysts may tend to differ on the exact percentage of decline in volumes this fiscal, but there is no debate on year-on-year contraction in volumes. Edelweiss Securities expects year-on-year volumes to contract by 15% in FY14, while Kotak Institutional Equities expects it to fall by 25%.
On an average, a down cycle lasts 14 months, but this time around, analysts are not sure when the cycle will turn. Most analysts have cut their volume estimates for medium and heavy commercial vehicles in the current fiscal. The September sales numbers suggest that there is reason behind this.
Tata Motors reported a 42 2% year-on-year decline in sales of medium and heavy commercial vehicles. However, month-on-month, volumes were up seven%. Sales of light commercial vehicles have also decline 27% Y-o-Y for Tata Motors. Antique Stock Broking says:
“We prefer to remain on the sidelines in the MHCV space as we do not see any recovery in the near- to medium-term.” Kotak has downgraded Ashok Leyland and lowered target prices for Ashok Leyland, Bharat Forge and Tata Motors, which now stand at Rs 15 (from Rs 18 earlier), Rs 220 (unchanged) and Rs 365 (from Rs 375 earlier), respectively.
