Covid-19 impact: Commercial vehicle sales to contract another 8-10% in FY21

The commercial vehicle (CV) industry, already under pressure due to the economic slowdown, axle load norms, GST and other issues, is now facing another challenge in the coronavirus outbreak. These factors are likely to lead to a further contraction of 8-10% in FY21, with profitability and credit metrics of CV OEMs likely to remain under pressure.

ICRA said that it continues to maintain a negative outlook for the commercial vehicle (CV) segment over the near-term, given the slowing economic growth, current overcapacity in the CV ecosystem and not so benign financing environment, with challenges further aggravated by the recent and rapid spread of novel coronavirus in India. The demand headwinds are expected to continue over the near-term given the macroeconomic challenges in view of the recent pandemic outbreak, coupled with weakening financial profile of fleet operators and significant price hikes because of transition to BS-VI emission norms. This would exert pressure on earnings and overall credit profile of CV OEMs, which have witnessed sharp earnings contraction over the past 3-4 quarters.

Shamsher Dewan, Vice President, ICRA, said that in particular, the M&HCV (truck) segment has been significantly impacted over the past year, with volumes contracting by a sharp 42 per cent in 2019-2020.

The excess capacity created in the system after the revision of axle load norms in July 2018 and faster turnaround of vehicles post GST implementation, coupled with a slowdown in the economy and infrastructure projects and the resultant lower freight availability continue to weigh on demand prospects.

Moreover, the rapid spread of coronavirus and the lockdown imposed in the country has had a significant impact on the movement of goods and freight availability over recent weeks and is likley to continue over the near-term. Accordingly, the outlook for the next fiscal, especially the first half, remains weak given the macroeconomic headwinds in view of recent pandemic outbreak coupled with significant price hikes because of transition to the new emission norms. Any recovery in the latter half hinges on a pick-up in construction activity. However, despite some channel inventory filling measures of OEMs, M&HCV (Truck) sales are expected to close the upcoming fiscal with a further decline of 12-14% during FY21, said Dewan

Girish Wagh, president, Commercial Vehicles Business Unit, Tata Motors Ltd said, domestic sales in March 2020 came in at 5,336 units, deeply impacted by the COVID 19 lockdown as well as the planned transition to BSVI. Retail sales were significantly ahead of bulk sales (>300%) and were 16 per cent higher than offtake for the entire year. Wagh further said that while nearly all BS IV vehicles in the ecosystem had been retailed, some were awaiting registration, which was halted due to the lockdown, but would be cleared in the window provided. The production of of BSVI vehicles was on track and the company had already sold the initial few BSVI vehicles, he noted.

"Our focus is to secure the extensive business continuity plan including ensuring full support to all our customers in need, particularly those who are transporting the essential goods during this challenging period," he said after releasing March numbers.

The LCV (truck) segment has been facing headwinds from the macroeconomic and consumption slowdown since the beginning of FY20. Coupled with subdued demand from rural and allied sectors, and tight financing environment, apart from inventory correction by OEMs, wholesale dispatches of LCVs (trucks) contracted by 13 per cent during YTD FY20. Despite the rural demand sentiment witnessing an uptick in recent months, supported by expectations of a healthy rabi output, ICRA expects the outbreak of novel coronavirus and the associated lockdown and restricted movement of goods to have a bearing on the segment over the near term. Accordingly, despite recovery expectations during the latter half, the LCV segment is expected to contract further by 7-9% during FY21. Moreover, prolonged disruptions due to recent coronavirus outbreak pos further downside risks to this.

According to Icra, with cash flows of fleet operators under pressure due to the aforementioned factors, replacement demand for new trucks is likely to remain muted till any meaningful pick-up in the economy and infrastructure projects fructifies. Additionally, the recent pandemic outbreak remains a significant unknown which can have a bearing on the economy and CV sales over the near to medium term. ICRA believes an improvement in economic environment and resolution of liquidity constraints remain critical for a sustained revival in the industry. "In absence of either, we maintain a subdued outlook for the industry for the next fiscal," ICRA stated.

The sharp volume contraction and resultant negative operating leverage coupled with elevated level of discounts exerted significant pressure on earnings and credit metrics of CV OEMs during the current fiscal. These pressures are expected to continue, at least over the next couple of quarters, before recovery sets in the industry. Furthermore, any unsold BS-IV inventory and its write-off can also exert pressure on CV OEM’s profitability. Accordingly, ICRA expects profitability and credit metrics of CV OEMs to likely remain under pressure in the near-term.