Medium, heavy commercial vehicles to grow at 13-17% in FY'16

Capacity overhang in CV sector likely to continue and could intensify pricing pressure for OEMs

The medium and heavy commercial vehicle segment will see volume growth of 13-17% next fiscal and drive the CV sector, while LCVs will see only a marginal growth of up to 3%, says a report.

Despite this volume recovery, however, the capacity overhang in the CV sector is likely to continue and could intensify the pricing pressure for original equipment manufacturers, it said.

"We expect the MHCV segment will report volume growth of 13-17% y-o-y in FY'16 to be backed by higher growth in the second half than in the first half. This is based on the agency's expectation of stronger recovery in industrial activity in 2HFY16," India Ratings & Research said.

"While moderate volume increase in H1 FY'16 is likely to be due to replacement demand, the volume increase during H2 FY'16 will be driven by the expansion by fleet operators, resulting in significant growth for the full year. Due to the lower cyclicality in Light Commercial Vehicle segment, it is expected to lag behind MHCVs in terms of recovery," it said.

The industry capacity utilisation in case of CVs last fiscal was around 50% of the estimated capacity of 1.4 million units. Despite the estimated recovery in volumes in FY'16, utilisation levels are likely to reign in the range of 45 to 50% in case of CVs.

Ind-Ra expects growing volumes to benefit credit profiles of even those CV companies with limited geographical or product diversification. In particular, MHCV players could see a marked recovery in their credit profiles in FY'16.

Given the structural issues of overcapacity and intensifying competition, it does not envisage a positive outlook revision in the event of a modest revival in sales.

However, the curtailment or postponement of planned capacity addition coupled with sales volumes equal to those in FY11-FY12 could have a positive impact on credit profile of the sector, Ind-Ra said.

A negative outlook revision could result from sales revival for MHCVs witnessed thus far in 2014-15 not being sustained in 2015-16.

A significant decline in sales volumes of various auto industry segments due to muted economic activity or otherwise could also negatively impact the outlook.

Additionally, any external shock pressuring the rupee and the subsequent spurt in the interest rate could impact the economy moderately. This may affect the volumes as well as the credit profiles of auto companies, it said.