Long term growth prospects remain intact in Indian CV industry

The strong recovery witnessed in the domestic commercial vehicle (CV) sector in the second half of the financial year 2009-10 (FY2010) has continued in the current fiscal with the April-November 2010 period reporting a growth of 35.2% over the corresponding previous year. Steady growth in economic activity, pick-up in demand from across end-user segments, adequate availability of financing at competitive rates, and improvement in the overall sentiment are among the key factors that have collectively aided the growth across the segments of the CV industry. Part of the growth has also been facilitated by pre-buying, a phenomenon witnessed during September 2010, ahead of changes in emission norms taking effect from October 1, 2010. Subrata Ray, Sr. V.P & Head-Corporate Ratings, ICRA (formerly Investment Information and Credit rating Agency of India) says, “The medium to long term outlook for the domestic CV industry remains robust, given the expectations of strong economic activity and infrastructure development, besides the inter-segmental shift. However, the sharp growth in volumes that was witnessed during the last 6-7 quarters may moderate to an extent in the short term. The contributing factors include, among others, partial withdrawal of the stimulus package; increase in vehicle prices following the successive price revisions (upward) made by the OEMs following the rise in input material costs; and the absence of the pre-buying that happened ahead of implementation of BS III norms. While the long-term growth prospects for the domestic CV industry remain favourable, pricing flexibility for the OEMs is likely to remain constrained mainly because of the entry of new players in the industry and the capacity additions taking place. Besides, the CV industry would also have to cope with the cost pressures arising from the tightening of regulatory norms on safety and emission.” Overall, the growth in the medium and heavy commercial vehicle (M&HCV) segment has been stronger at 47.4% as compared with the light commercial vehicle (LCV) segment, which reported a 25.8% growth during the same period. Within the M&HCV segment, the tractor-trailer segment was the first to witness recovery with increasing demand for transportation of industrial commodities and pick-up in foreign trade, while the tipper segment, which derives demand from the construction and infrastructure projects, witnessed a more gradual recovery. Over the past three to four quarters, original equipment manufacturers (OEMs) have effected successive price increases averaging over 10% to recover the increase in input material prices and the cost of making the transition from BS II to BS III emission norms. While economic activity remains buoyant and freight rates firm, the increase in ownership cost along with rising interest rates and fuel prices is likely to exert some pressure on the viability and cash flows of fleet operators. With growth in the CV segment during Q2 FY2011 having been driven partly by pre-buying ahead of BS III, ICRA expects growth in the second half (H2) of FY2011 to be relatively subdued. In terms of competition, while in the past, international OEMs were unable to make a major dent in the domestic CV market (characterised by a duopolistic structure), they have now ventured in through joint ventures (JVs) with some of the domestic players, thereby raising the prospects of increasing competitive intensity. Examples of such JVs include the ones between Mahindra and Mahindra and Navistar; Eicher Motors and Volvo; Force Motors and MAN; and Ashok Leyland[1] and Nissan. Some of the JVs are likely to benefit from the in-depth understanding of the domestic market that the local players have, their established vendor base, and their extensive marketing and distribution reach. Nevertheless, the incumbents, in defending their market position, would continue to draw strength from their established brand franchise, extensive service and distribution network, and competitive cost structures. Over the medium term, the growth is likely to be higher in the upper end of the M&HCV segment (that is 16T and above) and in the lower band of the LCV segment (that is less than 3.5T segment). We expect the domestic M&HCV segment to grow in the range of 9.5%-11.5% over the next five years and the LCV segment to grow in the range of 10-13% with growth in the (less than 3.5T) estimated to be higher at 13-15% during the same period.