Slowdown in truck sales may continue

Even as global majors like Daimler and Nissan drive into India, the slowdown in commercial vehicles (CVs) could prolong before sales recover.

''The excess supply will get absorbed over the next 12 months. I don't see a recovery before the second half of 2008-09,'' says T Srinivasaraghavan, MD, Sundaram Finance.

Signs of this are already visible. In an economy growing at 9 per cent, sales of medium and heavy commercial vehicles (M&HCVs) fell 4 per cent in the nine months ended December 2007, after growing 39 per cent in the corresponding period last year, and at 21 per cent and 39 per cent during last two fiscals.

The slowdown is a result of chronic oversupply, rising interest rates and a lax enforcement of ban on overloading of vehicles in many states.

''Overloading coupled with rising interest rates are pushing truckers to defer purchases,'' says Ramnath Subramaniam, director, IDFC SSKI Securities.

Experts say transporters with national permits cannot do overloading as one state (Uttar Pradesh) en-route could be enforcing the ban, while others may not (say, Bihar, WB). Overloading is more rampant for transport within a state.

While there are no estimates of the extent of oversupply, one needs to understand the nature of the capacity addition to gauge the slowdown.

The availability of cheap credit in the last few years has drove sales to high trajectory. CV sales, which have long grown at twice the GDP rate, grew at a compound annual growth rate (CAGR) of 25 per cent for the last four years, which industry experts feel is unsustainable.

The real growth in tonnage, however, was much higher. Twelve-tonne trucks were replaced by 25-tonne trucks; 16-tonne trucks were replaced by 25-tonne trucks, and now being replaced by 35-tonne and 40-tonne trucks.

One truck was not replacing one truck but perhaps one-and-half trucks. If one understands this aspect of the downturn, the story becomes clear.

The improvement in road infrastructure has brought down the turnaround time. If earlier, a truck took four days to reach from Delhi to Mumbai, it can do so now at 60 per cent of that time. This has also added capacity.

Better roads have meant lesser wear and tear, which has brought down the replacement cycle. A transporter, who used to replace his truck every three years, now needs to replace his truck only in four or five years.

Manufacturers are taking note. Ashok Leyland, which had planned to increase capacity by 100,000 units a year by 2010 to its existing capacity of 80,000 units a year, has partly shelved and deferred its expansion plans.

This increase was to come up in two locations (Chennai and Uttarakhand). Leyland has now decided to increase capacity only in Chennai by 50,000, which will come up by 2012, two years later than it had originally planned.

With the railways getting more aggressive, transporters are feeling the heat. ''The railways are slowly killing our business,'' says Rakesh Singh, a Delhi-based transporter, who has been losing business to the railways.

Singh used to ferry 25,000 tonnes of steel produced by Steel Authority of India Ltd's (SAIL's) Durgapur plant to markets in the North. Now, the same steel is loaded onto rail wagons from the steel plant and shipped across the country.

Experts downplay the threat from railways. ''The railways will be cheaper on long routes but road transport will remain relevant for shorter, door-to-door deliveries,'' says A Ramasubramanian, CEO (CVs), Eicher Motors.

''For the past six decades (since 1950), rail has continually ceded ground to road. This trend is likely to continue. In many developed economies of the world, road has the lion's share of transportation,'' said a spokesman for Tata Motors.

With the road infrastructure falling in place, transporters are buying heavier and more powerful trucks. This will reduce trip times and enable higher utilisation of trucks, making road transportation relatively more economical to rail transport.

''The basic problem is the excess supply of vehicles. Many people have entered the market with one or two trucks; even mechanics and truck-body builders have bought trucks,'' says Pawan Gupta of Best Roadways, a Delhi-based transporter.

In addition, freight rates have not kept pace with the cost of operations (see graph). Diesel price, which forms 62 per cent of the cost, has gone up 70 per cent since June 2002 and similarly, costs on insurance, road tax, tolls and sundry expenses.

''Ten years back, a transporter used to get Rs 28,000 a trip to move goods from Delhi to Bangalore. Today, he gets Rs 30,000-32,000 for the same trip. Viability is a big issue,'' says Saravpreet Singh, an executive of HDFC Bank.

The rising fuel costs have been partly offset by bigger and more fuel-efficient vehicles. ''Today's vehicles are 30-40 per cent fuel-efficient than a decade ago. In addition, the tonne/km/travel cost has come down with the use of bigger vehicles,'' says Eicher's Ramasubramanian.

''The slowdown is a result of a combination of factors. Transporters have taken much higher exposure when rates were low. Interest rates on a unit cost basis may not be much but if you have bought 10 trucks, you have a larger liability to service. That's going to hurt his cash flows,'' adds Srinivasaraghavan.

Hoping for a recovery

CV manufacturers and analysts are pinning their hopes on an early recovery in sales. Tata Motors, point out analysts, sold more trucks in December 2007 than in June 2007 though sales were 11 per cent lower than December 2006. Tata Motors' December sales were 33 per cent more than sales in October 2007.

''The base effect will catch on. We expect 15 per cent quarterly growth in this quarter, and thereafter growth will moderate to 8 per cent. If the ban on overloading is implemented, growth could be higher,'' says Ramnath Subramaniam, director, IDFC SSKI Securities.

The problem with the logic is that even sales in 2006 showed a similar trend, except December sales were 46 per cent higher than June sales, thanks to sudden demand spurred by the Supreme Court ban on overloading in November 2006.

CV sales are sluggish in the first quarter, pick up in Monsoon and the second quarter, and are the highest in the last quarter. Others point to the recovery in LCV sales, which grew by 14 per cent during the nine months ended December 2007.

"The recovery is normally led by LCVs, and HCVs would follow perhaps with a lag of three to six months period,'' says Eicher's Ramasubramanian.