Indian CV industry saddled with Rs 5800 crore inventory of BS III vehicles

The Indian commercial vehicle manufacturers are sitting on a sizeable stock of unsold inventory worth approximately Rs 4600 crore to Rs 5800 crore as a fallout of the Supreme Court ban on selling commercial vehicles post April 1, 2017.  This was revealed by ICRA Research Services in a brief note.

 In a setback to the automobile industry, the Supreme Court of India had banned the sale of Bharat Stage (BS)-III vehicles just two days prior to the implementation of new emission norms. As a result of this development, the Commercial Vehicle (CV) industry is currently staring at a sizeable stock of unsold BS-III vehicles and sharp contraction in earnings on account of a) deep discounts extended to clear existing inventory and b) costs associated with re-calls and possible upgradation to BS-IV norms, ICRA said.

According to industry estimates, the CV industry had approximately 95,000 BS-III vehicles in March 2017, of which they were able to clear only 50,000-60,000 units (or 55-65%) in the last two days of the fiscal 2017 despite sharp increase in discounts (ranging between 10-30%) offered by OEMs as well as dealers.

Accordingly, CV OEMs are now sitting on sizeable stock of unsold inventory, which is worth approximately Rs. 46-58 billion. ICRA believes exports of these vehicles to near-by markets where emission norms have still not progressed to Euro-IV or equivalent appears to be the most suitable option available with OEMs as upgradation to BS-IV has limited possibility.

 This is primarily because of the fact the technology to meet BS-IV norms has undergone a significant shift in case of CVs as engines technology has moved from largely mechanical to electro-mechanical. Apart from changes in engine technology, the exhaust system has also been upgraded to either Exhaust Gas Re-circulation (EGR) or Selective Catalytic Reduction (SCR) technology to achieve higher reduction in Nox levels under BS-IV.

Liquidating inventory could take up to two quarters depending on model-mix and inventory ageing

Nonetheless, companies will have to incur sizeable expense in reverse logistics and other fitments necessary to adapt unsold inventory for export requirements.

Confluence of factors dampened domestic CV demand in FY 2016-17

Meanwhile, in another report, ICRA stated that the domestic CV industry is expected the end the fiscal 2016-17 with a growth of 5-6% in comparison to 11.5% witnessed in the prior year. Confluence of factors including waning replacement-led demand, weak cargo availability from industrial sectors and uncertainty related to effective taxation on CV industry under the GST regime were the key factors that contributed to the slowdown.

The domestic CV volumes took a further hit after November 2016 when GOI's demonetisation move put brakes on the operations of road logistics sector which depends heavily on cash transactions.

ICRA believes that as a result of pre-buying (although lower than expected), CV demand would be relatively subdued in early part of the current fiscal 2017-2018. Moreover, with possible implementation of GST, fleet operators are likely to put their investments plans on hold, while OEMs would also prefer to align their production and inventory levels to the new taxation regime. Accordingly, the near-term outlook is subdued. ICRA expects that industry will find its momentum back a) aided by increased thrust on infrastructure and rural sectors in the recent budget, b) potential implementation of fleet modernization or scrappage program and c) higher demand from consumption-driven sectors and e-commerce logistic service providers, especially for LCVs and ICVs. Given these considerations, ICRA expects the domestic CV industry is likely to register a growth of 6-8% in FY 2018 (2017-2018).