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
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
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
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