ICRA continues to maintain a Negative outlook for the commercial vehicle (CV) segment over the near-term, given the slowing economic growth, current overcapacity in the CV ecosystem and not so benign financing environment, with challenges further aggravated by the recent and rapid spread of novel coronavirus in India. The demand headwinds are expected to continue over the near-term given the macroeconomic challenges in view of the recent pandemic outbreak coupled with weakening financial profile of fleet operators and significant price hikes because of transition to BS-VI emission norms. This would exert pressure on earnings and overall credit profile of CV OEMs, which have witnessed sharp earnings contraction over the past 3-4 quarters.
Says Mr. Shamsher Dewan, Vice President, ICRA, “In particular, the M&HCV (Truck) segment has been significantly impacted over the past year, with volumes contracting by a sharp 42% in YTD FY2020. Excess capacity created in the system post revision of axle load norms in July 2018 and faster turnaround of vehicle post GST implementation, coupled with a slowdown in the economy and infrastructure projects and the resultant lower freight availability continue to weigh on the demand prospects. Furthermore, the rapid spread of coronavirus and the lockdown imposed in the country has had a significant impact on goods movement and freight availability over recent weeks and may continue over the near-term. Accordingly, the outlook for the next fiscal, especially the first half, remains weak given the macroeconomic headwinds in view of recent pandemic outbreak coupled with significant price hikes because of the transition to the new emission norms. Any recovery in the latter half hinges on pick-up in construction activity. However, despite some channel inventory filling measures of OEMs, M&HCV (Truck) sales are expected to close the upcoming fiscal with a further decline of 12-14% during FY2021e.”
As for the LCV (Truck) segment, the same started facing headwinds from
the macroeconomic and consumption slowdown since the beginning of FY2020.
Coupled with subdued demand from rural and allied sectors, and tight financing
environment, besides inventory correction by OEMs, wholesale dispatches of LCV
(Trucks) contracted by 13% during YTD FY2020. Despite the rural demand
sentiment witnessing an uptick in recent months, supported by expectations of a
healthy rabi output, ICRA expects the outbreak of novel coronavirus and the
associated lockdown and restricted movement of goods to have a bearing on the
segment over the near term. Accordingly, despite recovery expectations during
the latter half, the LCV (Truck) segment is expected to contract further by
7-9% during FY2021e. Furthermore, prolonged disruptions due to recent
coronavirus outbreak poses further downside risks to this.
The Passenger Carrier segment, while relatively insulated from the impact of reduced load availability, is also expected to report demand contraction in the next fiscal. With some pre-buying trends witnessed in the segment in the current fiscal, and state finances likely to be directed towards COVID relief measures, it is unlikely that SRTU replacement demand would be a significant growth driver in the upcoming fiscal. Additionally, the impact on operations of schools, colleges, and offices due to the pandemic outbreak would also affect the demand from the School/College and Staff Carrier segments. Accordingly, ICRA expects the segment volumes to contract by 8-10% during FY2021e.
Adds Mr. Dewan, “With cash flows of fleet operators under pressure due to afore-mentioned factors, replacement demand for new trucks is likely to remain muted till any meaningful pick-up in the economy and infrastructure projects fructify. Additionally, the recent pandemic outbreak remains a significant unknown which can have a bearing on the economy and CV sales over the near to medium term. ICRA believes an improvement in the economic environment and resolution of liquidity constraints remain critical for a sustained revival in the industry. In the absence of either, we maintain a subdued outlook for the industry for the next fiscal.” The sharp volume contraction and resultant negative operating leverage coupled with an elevated level of discounts exerted significant pressure on earnings and credit metrics of CV OEMs during the current fiscal. These pressures are expected to continue at least over the next couple of quarters, before recovery sets in the industry. Furthermore, any unsold BS-IV inventory and their write-off can also exert pressure on CV OEM’s profitability. Accordingly, ICRA expects profitability and credit metrics of CV OEMs are likely to remain under pressure over the near-term
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