Domestic commercial vehicle sales likely to dip 4-7% in FY25: ICRA

The Indian commercial vehicle (CV) industry is expected to see a decline of 4-7 per cent in wholesale volumes in FY25, according to rating agency ICRA. The anticipated downturn follows a period of muted growth along with several influencing factors, such as the high base effect from previous financial years and a slowdown in economic activities due to the upcoming General Elections in 2024. Infrastructure projects are likely to be impacted in the first few months of FY25, further affecting CV demand.

In February 2024, the industry saw a slight 0.7 per cent year-on-year decline in wholesale volumes, although it managed a 5.1 per cent sequential growth. This mixed performance was attributed to reduced construction activity ahead of the implementation of the model code of conduct for General Elections and broader base effects. Conversely, retail volumes experienced a 4.8 per cent year-on-year increase despite a 0.9 per cent sequential drop.

According to Kinjal Shah, vice president and co-group head of corporate ratings at ICRA, the significant growth in volumes and tonnage during FY22 and FY23 set a high base, which, coupled with the economic slowdown ahead of the General Elections, has contributed to the expected decline in FY25. Despite a 2.1 per cent year-on-year growth in domestic CV wholesale volumes over the first 11 months of FY24, a slowdown in construction activities during the latter part of the financial year has offset initial gains.

The medium and heavy commercial vehicles (M&HCV) segment is predicted to see a decline of 4-7 per cent in FY25. This segment ended FY24 with a 4 per cent year-on-year (Y-o-Y) growth, primarily driven by an improved macroeconomic environment and higher freight availability early in the financial year. However, muted demand in the later months contributed to the overall decline.

The light commercial vehicles (LCV) segment is also expected to face a downturn, with a forecasted decline of 5-8 per cent in FY25. The factors influencing this decline include the high base effect, a sustained slowdown in e-commerce, and competition from electric three-wheelers (e3Ws). The LCV segment witnessed a 3 per cent year-on-year decline in FY24 due to these challenges, along with a deficit in rainfall impacting the rural economy.

In contrast, the bus segment is anticipated to grow by 2-5 per cent in FY25, driven by the replacement demand from state road transport undertakings (SRTUs) and the scrappage of older government vehicles. The segment exceeded pre-COVID levels in FY24, with a significant 27 per cent year-on-year growth, supported by low base effects and increasing penetration of electric buses.

According to the Federation of Automobile Dealers Association (FADA), commercial vehicle original equipment manufacturer (OEM) sales in April 2024 were 90,707 units, compared to 88,663 units in April 2023, representing an increase of 2.3 per cent.

ICRA also expects the operating profit margins (OPM) of domestic CV manufacturers to decline marginally in FY25 to 8.5-9.5 per cent. This is due to lower volumes and higher competitive pricing pressures. The OPM had improved by 250-300 basis points in FY24 due to record-high industry volumes and favourable commodity prices.

Going ahead, the investment in the industry is set to rise, with capital expenditures projected to increase to approximately Rs 59 billion in FY25 from Rs 37 billion in FY24. These investments will focus on product development, technology upgrades, and maintenance-related capital expenditures.

While the near-term outlook for the domestic CV industry appears challenging, the long-term growth drivers remain robust. These include sustained infrastructure development, increased mining activities, and improvements in road and highway connectivity. Despite the anticipated decline in FY25, the replacement demand, particularly due to an ageing fleet, is expected to support CV volumes in the medium term.