ICRA has come out with its quarterly review on Indian commercial vehicle industry for December 2011. As per the research firm slowdown imminent as headwinds gain momentum.
After registering a strong 30%+ growth over the past two fiscals, the growth in the Commercial Vehicle (CV) industry has somewhat slowed down during the current year. During April-November 2011, the domestic CV industry posted a growth of 21.0% on YoY basis riding on a strong 31.4% growth in LCVs and a fairly muted 9.5% in M&HCVs. Steadily rising interest rates, contracting industrial output and a considerable increase in vehicle prices coupled with high-base effect of previous years are the main factors impacting growth. The operating environment for fleet operators has been deteriorating over the past six months. All factors that influence the viability appear to be weighing against the profitability and cash flows of operators. The sharp rise in overall cost of ownership combined with considerable rise in operating costs and an almost stagnant freight rates in a confluence are displaying signs of pressures on fleet operators. Several operators have postponed their expansion plans in view of rising interest rates and expectation of slowing industrial growth. Capacity utilisation is gradually declining and freight rates continue to remain stagnant despite rise in operating expenditure for operators. On the financing front, some of the financiers have also started tightening lending norms in addition to the rise in interest rates. Overall, the near term risks against M&HCV demand has increased significantly, though structurally, the demand over a longer period remains intact, subject to normalization of economic activity over the next 2-3 quarters.
Given the current environment where the growth in industrial activity is at a two year low and the operating environment for fleet operators is gradually weakening. As a result, the outlook for the near term appears to be subdued, resulting in a slowdown in new vehicle sales. Among segments, M&HCVs which tend to be more influenced by the macro-economic indicators is likely to register a weaker performance over the near term as against the steadily growing LCV segment. The proliferation of the hub-n-spoke model, improving last mile connectivity and last but not the least the strong demand originating from rural segment is likely to drive demand in the LCV segment over the medium term. In terms of the competitive landscape, while some of the established but smaller OEMs have expanded their product portfolios and market coverage, the competition from new players is unlikely to hurt the strong market position of incumbents in the near term as the former go through a phase of developing credible track record for their products and create market reach, an imperative for the CV industry.
Over the past few months, the macro-economic environment in India has weakened considerably led by a whole host of factors. The sharp rise in interest rates as a result of the considerable credit tightening measures to overcome accelerating inflationary pressures, contraction in industrial activity and an overall decline in business optimism have collectively resulted in moderation in GDP during the current year. These factors combined with relatively subdued pick up in infrastructure spending have started weighing on the demand for new CVs especially the heavy commercial vehicle segment. In the recent months, the index of industrial production (IIP) which serves as a proxy for the CV sector has contracted sharply and has registered one of its lowest growths in the past two years.
There is a definite slowdown in freight availability led by some of the core manufacturing sectors. The impact is more visible in certain segments like container movement, mining, automobiles (led by slowdown in passenger vehicle segment) and heavy industries such as steel. Given the high sensitivity to industrial activity and weakening operating metrics for fleet operators, we expect the industry to witness a subdued demand as capacity addition takes a back seat.
Rise in ownership cost + stagnant freight rates act as double whammy for operatorsThe operating environment for fleet operators has been deteriorating over the past six months. All factors that influence the viability appear to be weighing on the profitability and cash flows of operators. The sharp rise in overall cost of ownership combined with considerable rise in operating costs and an almost stagnant freight rates in a confluence are displaying signs of pressures on fleet operators.
Freight rates across major routes have only risen to the extent of diesel price increases and the rise has not been enough to compensate for the inflation in other operating costs. Freight rates from Southern & Eastern regions have remained marginally weak, while those from Northern & Western markets continue to hold on.
In such a scenario when pressure is building up on small fleet operators, large organized players continue to exhibit a relatively stable earnings profile. Most of the organized players cater to institutional clients on long-term contracts that ensure pass through of operating costs especially variation in fuel prices. Additionally, the organized logistics players largely depend on market-sourced fleet which considerably reduces the risk during periods of slowdown and adds to their bargaining power while negotiating on freight rates.
Slowdown in demand for M&HCVs is imminent
Since the beginning of the current quarter, there are initial signs of slowdown which coupled with pressures on operator’s cash flows post a relatively weak outlook for M&HCV demand in the near term. Within the segment, MAVs, tractor trailers which tend to have higher dependence on industrial activity have been impacted more, while ICVs have continued to exhibit fairly stable growth.
Emergence of hub-n-spoke model is playing outThe trucking segment in India is witnessing interesting trends, while the M&HCV segment is witnessing steady increase in share of heavy duty, long haulage trucks owing improvement in road and highway infrastructure, the LCV goods segment is seeing increasing share of sub 1T segment with the emergence of the hub-n-spoke model and increasing demand for last mile connectivity. As shown along side, higher tonnage trucks (16T+) offer higher profitability (benefits of operating leverage) as operating costs (besides fuel) are similar to lower tonnage vehicles. Besides improving highway infrastructure, the trend towards higher tonnage trucks has also been supported by the introduction of newer, advanced platforms/vehicles by both incumbents as well as foreign OEMs.
Source : ICRA report, Moneycontrol.com
After registering a strong 30%+ growth over the past two fiscals, the growth in the Commercial Vehicle (CV) industry has somewhat slowed down during the current year. During April-November 2011, the domestic CV industry posted a growth of 21.0% on YoY basis riding on a strong 31.4% growth in LCVs and a fairly muted 9.5% in M&HCVs. Steadily rising interest rates, contracting industrial output and a considerable increase in vehicle prices coupled with high-base effect of previous years are the main factors impacting growth. The operating environment for fleet operators has been deteriorating over the past six months. All factors that influence the viability appear to be weighing against the profitability and cash flows of operators. The sharp rise in overall cost of ownership combined with considerable rise in operating costs and an almost stagnant freight rates in a confluence are displaying signs of pressures on fleet operators. Several operators have postponed their expansion plans in view of rising interest rates and expectation of slowing industrial growth. Capacity utilisation is gradually declining and freight rates continue to remain stagnant despite rise in operating expenditure for operators. On the financing front, some of the financiers have also started tightening lending norms in addition to the rise in interest rates. Overall, the near term risks against M&HCV demand has increased significantly, though structurally, the demand over a longer period remains intact, subject to normalization of economic activity over the next 2-3 quarters.
Given the current environment where the growth in industrial activity is at a two year low and the operating environment for fleet operators is gradually weakening. As a result, the outlook for the near term appears to be subdued, resulting in a slowdown in new vehicle sales. Among segments, M&HCVs which tend to be more influenced by the macro-economic indicators is likely to register a weaker performance over the near term as against the steadily growing LCV segment. The proliferation of the hub-n-spoke model, improving last mile connectivity and last but not the least the strong demand originating from rural segment is likely to drive demand in the LCV segment over the medium term. In terms of the competitive landscape, while some of the established but smaller OEMs have expanded their product portfolios and market coverage, the competition from new players is unlikely to hurt the strong market position of incumbents in the near term as the former go through a phase of developing credible track record for their products and create market reach, an imperative for the CV industry.
Over the past few months, the macro-economic environment in India has weakened considerably led by a whole host of factors. The sharp rise in interest rates as a result of the considerable credit tightening measures to overcome accelerating inflationary pressures, contraction in industrial activity and an overall decline in business optimism have collectively resulted in moderation in GDP during the current year. These factors combined with relatively subdued pick up in infrastructure spending have started weighing on the demand for new CVs especially the heavy commercial vehicle segment. In the recent months, the index of industrial production (IIP) which serves as a proxy for the CV sector has contracted sharply and has registered one of its lowest growths in the past two years.
There is a definite slowdown in freight availability led by some of the core manufacturing sectors. The impact is more visible in certain segments like container movement, mining, automobiles (led by slowdown in passenger vehicle segment) and heavy industries such as steel. Given the high sensitivity to industrial activity and weakening operating metrics for fleet operators, we expect the industry to witness a subdued demand as capacity addition takes a back seat.
Rise in ownership cost + stagnant freight rates act as double whammy for operatorsThe operating environment for fleet operators has been deteriorating over the past six months. All factors that influence the viability appear to be weighing on the profitability and cash flows of operators. The sharp rise in overall cost of ownership combined with considerable rise in operating costs and an almost stagnant freight rates in a confluence are displaying signs of pressures on fleet operators.
Freight rates across major routes have only risen to the extent of diesel price increases and the rise has not been enough to compensate for the inflation in other operating costs. Freight rates from Southern & Eastern regions have remained marginally weak, while those from Northern & Western markets continue to hold on.
In such a scenario when pressure is building up on small fleet operators, large organized players continue to exhibit a relatively stable earnings profile. Most of the organized players cater to institutional clients on long-term contracts that ensure pass through of operating costs especially variation in fuel prices. Additionally, the organized logistics players largely depend on market-sourced fleet which considerably reduces the risk during periods of slowdown and adds to their bargaining power while negotiating on freight rates.
Slowdown in demand for M&HCVs is imminent
Since the beginning of the current quarter, there are initial signs of slowdown which coupled with pressures on operator’s cash flows post a relatively weak outlook for M&HCV demand in the near term. Within the segment, MAVs, tractor trailers which tend to have higher dependence on industrial activity have been impacted more, while ICVs have continued to exhibit fairly stable growth.
Emergence of hub-n-spoke model is playing outThe trucking segment in India is witnessing interesting trends, while the M&HCV segment is witnessing steady increase in share of heavy duty, long haulage trucks owing improvement in road and highway infrastructure, the LCV goods segment is seeing increasing share of sub 1T segment with the emergence of the hub-n-spoke model and increasing demand for last mile connectivity. As shown along side, higher tonnage trucks (16T+) offer higher profitability (benefits of operating leverage) as operating costs (besides fuel) are similar to lower tonnage vehicles. Besides improving highway infrastructure, the trend towards higher tonnage trucks has also been supported by the introduction of newer, advanced platforms/vehicles by both incumbents as well as foreign OEMs.
Source : ICRA report, Moneycontrol.com
