Truck rentals decline amid overcapacity, drop in factory output

Sales of medium and heavy commercial vehicles (MHCVs) dropped 21% to 31,299 units over the same period a year ago, according to the Society of Indian Automobile Manufacturers

Transporters are bracing for a long winter amid a drop in cargo and weak demand.

Despite recent increases in diesel prices, transporters have not been able to pass on the hike, and truck rentals on key trunk routes are down 1.5-2 per cent owing to drop in cargo from the factory gates and oversupply of trucks.

Cumulatively for November, December and the 15 days of January, rentals are down by 25-30 per cent, according to S P Singh, senior fellow at the Indian Foundation of Transport Research and Training (IFTRT).

“The drop in truck rentals outpaced diesel price cuts during November and December 2018 by 10-12 per cent (5-6 per cent in each month), leading to a steep fall in fleet utilisation,” said Singh.

After a dip in the last week of December, fuel prices have been rising since January 7, the latest being the 12 paise increase by the state-run fuel retailers on Wednesday. 

Sales of medium and heavy commercial vehicles (MHCVs) dropped 21 per cent to 31,299 units over the same period a year ago, according to the Society of Indian Automobile Manufacturers.

“We don’t see this trend breaking till September. Things are worsening every week. People are unable to meet their cash flows,” said Singh.

Others agreed. “Till six months ago, our trucks wouldn’t wait for the return load, but that has changed now. The average business done by our trucks has gone down 15 per cent. This has effectively wiped out our margin,” said Sanjeev Gupta, director at Caravan Roadways, which has a fleet of 300 trucks. Besides a contraction in factory output, Gupta also blames the reduced cargo offering to the changes in the axle load norms. 

On July 16, the government increased the official maximum load-carrying capacity of heavy vehicles, including trucks, by 20-25 per cent. This has proportionately reduced the number of vehicles required, said Gupta. The changes have created a spare capacity in the market, he added, pointing out that it will take at least a year to absorb the excess capacity. 

But truck makers remain optimistic. “We are still expecting this quarter to be a good one though not as strong as the March quarter of last year,” said Vinod Aggarwal, managing director and chief executive, Volvo Eicher Commercial Vehicle. The company will go ahead with its expansion plans, he added.

A contraction in manufacturing output, especially capital and consumer goods, pulled down industrial growth to a 17-month low of 0.5 per cent in November. This comes just a month after growth had scaled an 11-month high of 8.4 per cent in October. Economists attributed the subdued numbers to post-festive dullness in activities and a high base effect. The index of industrial production (IIP) had grown 8.5 per cent in November 2017. The manufacturing segment, which constitutes the bulk of the index of industrial production (IIP) at 77.6 per cent, contracted by 0.4 per cent in November against 8.24 per cent rise in October.

Hetal Gandhi, director at CRISIL, attributes the slowing truck sales to multiple factors. Diesel accounts for 50-55 per cent of the operating costs of a transporter operating a medium commercial vehicle (9-tonne payload truck). There is a drop of 12 per cent in the diesel prices from September 2018 to December 2018. The ideal drop in the freight rates should have been 6.5 per cent, but it has been 80 to 100 basis points higher, said Gandhi. 

The reason is the axle norms, which allow a truck to carry a higher load. This has resulted in a lower capacity utilisation for operators. “On the other hand, if we look at MHCV sales, the first half grew by 54 per cent on a base of 2 per cent growth. The base is strong and hence we expect Q3 to close with a decline of 8 per cent and Q4 to show muted growth,” said Gandhi.