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ICRA: An update note on Indian commercial vehicle industry


Emerging from two year down cycle; Credit profile of CV OEMs is likely to improve in FY 2015: ICRA

Pune (Nov. 4, 2014): With recovery in CV sales and expectations of improvement in earnings, we expect credit profile of CV OEMs to improve in FY 2015. In addition, some of the OEMs have also deferred their investment plans, which will be positive from their cash flow perspective. Furthermore, most of the OEMs are currently investing only in developing new vehicle platforms and engine technologies rather than adding capacity, which remains adequate to meet the demand over the medium-term.

The credit profile of OEMs in the CV space differs sharply with some of the OEMs having sizeable debt, while others maintaining healthy cash balances. For instance, while Tata Motors has sizeable debt (at a standalone level), its credit profile continues to derive benefit from its holdings in Jaguar Land Rover (JLR), its strong refinancing capabilities and position within the Tata group. On the other hand, Ashok Leyland too has initiated steps to reduce its debt burden by raising cash from equity dilution, divestment of non-core investments and scaling back capital expenditure plans. The other two OEMs – VECV and SML Isuzu continue to maintain strong credit profile on back of staggered investments and healthy cash reserves.

Emerging from a two year down cycle:  After two years of down cycle, the domestic Commercial Vehicle (CV) industry is gradually showing some signs of recovery. YTD FY 2015, the pace at which domestic CV sales have been declining has reduced to 10.1% compared to a contraction of 20.2% witnessed during FY 2014. Within the CV space, the Medium & Heavy Commercial Vehicle (M&HCV) Truck segment has in fact posted a positive growth of 4.2% in 6m FY 2015 while the HCV (16T+) segment, which accounts for almost half of total M&HCV (Truck) sales has been witnessing strong demand (up 22.3% in 6m FY 2015) on back of capacity addition by organized fleet operators and replacement demand to some extent. While the M&HCV Truck segment seems to have bottomed out, the LCV Truck segment is still experiencing demand contraction as significant capacity addition over the past few years and constrained financing environment amidst rising delinquencies remains a challenge for the segment. The bus segment, which contributes nearly 13% to industry sales, is also set to witness improvement in sales after various State Road Transport Undertakings (SRTUs) recently placed orders for new buses as part of the JNNURM II programme.

Operating environment for fleet operators is gradually improving: From fleet operator’s perspective, the operating environment over the couple of quarter has also stabilized as reflected by trend in freight rates, which now seem to be moving in line with diesel price movements. Our channel check with a wide spectrum of fleet operators based in the Northern & Western markets suggest that fleet utilization levels are gradually improving on back of higher load availability from some of the key freight generating sectors such as Automobiles, Cement and other export-import oriented industries. With reduced pressure on diesel prices, the pressure on viability or cash flows for fleet operators is also likely to ease going forward. These factors may also aid in improving the financing environment which has turned challenging (at least for Small Fleet Operators (SFOs) and First Time Buyers (FTBs) on back of sharp rising delinquency levels. Although asset quality indicators continued to deteriorate till Q2 FY 2015, most of the financiers expect that they are unlikely to deteriorate further. While the overall environment seems to be improving, there are still pockets of challenges. For instance, the demand for tippers is likely to remain subdued in view of delays in pick-up in mining activities in the affected states and sizeable idle capacity. Secondly, the declining re-sale values suggest that there is still overcapacity in the trucking system, which would act as a deterrent for new vehicles sales.

M&HCV segment is likely to post a growth 6-8% in FY 2015: We expect M&HCV segment to post a modest growth of 6-8% in FY 2015 with meaningful recovery remaining dependant on pick-up in infrastructure projects, industrial activity and overall capex cycle, all of which depends on the pace at which reformsin the land acquisition, mining and environmental clearances are implemented across key sectors.

While LCV segment is likely to witness contraction although lower than our earlier estimates:Unlike M&HCVs, we expect the LCV segment to witness de-growth of around 4-6% during FY 2015 as the trickle down impact of slowing economy on this segment has been a recent phenomenon. Further, the segment’s prospects are also influenced to a great extent by constrained financing environment amidst rising delinquencies. Nevertheless, driven by certain structurally favorable factor, the segment’s growth prospects over the medium-term remain intact. Some of the factors that are likely to support steady demand for LCVs going forward include a) further proliferation of “Hub-n-Spoke” logistics model, b) relatively untapped potential in semi-urban and rural areas and c) improving urbanization levels. Moreover, the emergence of SCVs has also been a source of attractive employment opportunities for FTBs, which along with an established financing market will also support demand for LCVs. Accordingly; we expect demand for LCVs will grow at CAGR (%) 10-12% over the medium term
Competitive Landscape: Interesting times ahead as new OEMs enter LCV segment and others launch refreshed models in HCVs