| After three years of accelerated growth, commercial vehicles seem to slam brake.
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| The growth of commercial vehicles (CVs), especially heavy commercial vehicles (HCVs), has slowed down during the June 2005 quarter, even as CV manufacturers' financial results show a mixed trend.
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| HCVs witnessed lower sales due to fuel price hikes and the implementation of new emission norms in parts of the country. However, light commercial vehicles (LCVs) clocked good growth. Will CVs pick up speed in the quarters to come or will their growth decelerate further?
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| As per the numbers available with Society of Indian Automobile Manufacturers (Siam), domestic sales of medium and heavy commercial vehicles decreased by 4.2 per cent y-o-y to 52,437 units during April-July 2005.
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| Exports came down 1.8 per cent to 3,639 units. Production was also marginally down by 0.07 per cent to 63,434 units. Domestic sales of LCVs grew by 11.6 per cent to 38,854 units, while their exports increased by over 100 per cent to 7,279 units.
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| Besides fuel price hikes, a downturn in the demand cycle also hit sales of HCVs. Ramnath S from SSKI Securities pegs the growth in HCVs at about 4-5 per cent for FY06. Demand for HCVs comes from new buyers and replacements. Demand for replacements has been affected. The freight rate index has not kept pace with the oil price rise, which impacted fleet operators.
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| Moreover, the attempt by consumers to buy vehicles earlier this year, before the Euro emission norms came into effect, extended last year's replacement demand cycle. Thus, this year there has been excess supply. But Ramnath sees better growth from October-November onwards.
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| On the brighter side, a report from Motilal Oswal Securities suggests that even HCVs are poised to see growth in the long term, due to demand for buses, and 30-tonne and small trucks. Factors like strong economic growth, restrictions on overloading, expected infrastructure growth and industrial capex will drive CV demand in the long term, it says.
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| Another leading brokerage holds the view that the growth in HCVs, which were witnessing 30-32 per cent growth per annum over past three years, has peaked. So a growth of 8-9 per cent is expected this year for CVs.
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| The bottomline growth of CV companies has been better, despite a shortage of components, due to labour issues and implementation of emission norms. But Ramnath opines that the problem of non-availability of auto components has been exaggerated.
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| Given the high correlation between fuel cost and demand for vehicles, dealers get affected and stocks pile up. Some analysts believe that the slowdown in topline growth will continue in the quarters to come, while CV manufacturers differ on whether the growth rate will be at single or double-digit levels.
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| Moreover, the growth in infrastructure in terms of highways has also been not up to the mark, which can have a dampening effect. Bottomline growth is likely to be flat, unless the companies post better operating margins.
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| LCVs can continue to bring cheer. This is due to growth through the Hub & Spoke model according to which HCVs reach the goods to a central location and LCVs distribute to surrounding locations.
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| Among HCVs, domestic sales of buses decreased by 18 per cent to 5,855 units during April-July 2005, while those of trucks dipped by 2 per cent to 46,582 units. Among buses, volumes of Ashok Leyland grew 39 per cent to 3,588 units compared with those of Tata Motors (down 57 per cent to 1,663 units), Eicher Motors (up 40 per cent to 313 units) and Swaraj Mazda (down 52 per cent to 188 units).
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| Among trucks from HCV segment, volumes of Ashok Leyland grew 22 per cent to 12,509 units, compared with Tata Motors (down 13 per cent to 28,342 units), Eicher Motors (up 20 per cent to 3,835 units) and Swaraj Mazda (up 17 per cent to 1,667 units).
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For the June 2005 quarter, Tata Motors, which controls about 57 per cent of the CV market in India, posted a 8.5 per cent topline growth y-o-y to Rs 3,878 crore. About 60 per cent of its revenues comes from CVs and the rest from cars/utility vehicles. Domestic CV volumes declined 7 per cent while export volumes increased 74 per cent.
| FINANCIALS: TATA MOTORS | | (In Rs crore) |
JQ04 |
JQ05 |
% change | |
Net sales |
3572.09 |
3878.09 |
8.57 | |
Operating profit |
429.44 |
487.75 |
13.58 | |
OPM (%) |
12.02 |
12.58 |
- | |
Net profit |
223.36 |
272.67 |
22.08 | |
EPS (Rs) |
6.26 |
7.25 |
- | |
P/E (12 months) | |
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16.93 |
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Its competitor, Ashok Leyland posted a 30 per cent topline growth at Rs 1,063 crore. It must be noted that the shortage in the supply of components was faced primarily by Tata Motors. Ashok Leyland's sales included some consignment to Iraq, according to analysts. Export prospects for Indian CVs are considered bright though it is not clear whether such consignments will continue or not.
| FINANCIALS: ASHOK LEYLAND | | (In Rs crore) |
JQ04 |
JQ05 |
% change | |
Net sales |
821.19 |
1063.23 |
29.47 | |
Operating profit |
75.00 |
89.04 |
18.72 | |
OPM (%) |
9.13 |
8.37 |
- | |
Net profit |
31.94 |
64.35 |
101.47 | |
EPS (Rs) |
0.27 |
0.54 |
- | |
P/E (12 months) | |
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13.06 |
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| According to Tata Motors, continuing input cost pressures, the increase in crude oil prices and interest rate movements are concerns.
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| It says volumes remained stagnant in the June 2005 quarter largely due to the uncertainty caused by the last-minute changes in emission regulations.
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| Tata Motors' bottomline grew 22 per cent to Rs 273 crore in the June 2005 quarter while that of Ashok Leyland rose 102 per cent to Rs 64 crore. While Tata Motors' operating profit margin increased 60 basis points to 12.6 per cent, that of Ashok Leyland decreased 70 basis points to 8.4 per cent. This could be explained by the mere 7.7 per cent increase in raw material costs of Tata Motor's (net of stock) against a 32 per cent rise that of Ashok Leyland.
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| June 2005 sales could be an aberration, as long-term factors that can drive growth of CV segment are in place. Interestingly, a report from Khandwala Securities opines that the recent heavy rains have affected about 15 lakh vehicles and may result in early replacement of old vehicles due to trade-offs between cost of damage and acquiring a new vehicle, which may also benefit auto makers to some extent. So trucks and buses are expected to hit the expressways soon after a brief halt at the wayside dhaba. |
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