Indian CV industry in 2017

The year 2017 is set to be yet another challenging year for the Indian
commercial vehicle industry.

Commercial Vehicle

17 Jan 2017

Story by: Bhushan Mhapralkar

The year 2017 is set to be yet another challenging year for the Indian commercial
vehicle industry.
The month of October 2016 was a good month for the Indian CV industry. M&HCV
sales grew 16.92 per cent with the sale of 25,934 M&HCVs as compared to 22,181 units
sold in the corresponding month last year. LCVs too posted good growth with the sale of
39,635 units, up 8.84 per cent, against the sale of 36,415 units in October 2015. Total CV
sales were 65,569 units, up 11.9 per cent, against the sale of 58,596 units in the
corresponding month last year. This was despite the industrial production in India
indicating a decline of 1.9 per cent over October 2015. With pan-India implementation of
BSIV emission norms and GST scheduled for April 2017, prebuying expectation is being
expressed by many industry leaders. This would add to the replacement demand, claimed
an industry expert. The announcement by prime minister Narenda Modi on the evening
of November 08, 2016, to withdraw Rs.500 and Rs.1000 notes from circulation changed
the situation overnight. The move, termed as demonetisation, saw people queuing in front
of banks and ATMs to deposit old notes and withdraw whatever new notes they could lay
their hands on.
Difficult times
The ATM withdrawal limit, capped at Rs.2000 per day, and the withdrawal limit at
the bank capped at Rs.24000 per week, added to the operational challenges of
transporters. Even after 50 days, the situation does not seem to have changed much. For
the CV industry, and transporters in particular, operational difficulties continue.
Improvement in cash flow has helped, but the fall in fleet utilisation levels is a matter of
concern. It would be appropriate to consider the announcement by Japanese brokerage
firm Nomura at this moment. It has announced that proprietry indices have dipped to the
lowest levels since 1996 with rural consumption showing the maximum impact. The full
grown impact of what is termed as demonetisation is expected to emerge this month. The
Nomura Composite Lending Index (CLI) for India for early 2017 has slumped to the
lowest levels, and is consistent with GDP growth of below six per cent.
Cool October, and a hot November
Against the backdrop of peak fleet utilisation levels in September and October 2016, a
sudden drop was observed in November 2016. The situation in December was more or
less the same. Claimed an industry expert, that the situation is expected to continue to be
the same for the current as well as the next quarter. Said SP Singh, Convenor, IFTRT,
The drop in fleet utilisation has been sharp. The issue is the steep fall in cargo despatch
post demonetisation as businesses and traders are not procuring goods due to unsold
inventories. Unlike Septmebr 2016 and October 2016, the situation post demonetisation,
it is clear, is not upbeat. Any chance of fleet utilisation going up drastically is being
looked upon for the later half of the next fiscal. Any expectation of prebuying in the wake
of pan-India implementation of BSIV emission norms from April 2017 may not hold
enough strength anymore. Nalin Mehta, Managing Director & CEO, Mahindra Trucks and
Buses Limited, expects prebuying. There is a lot of time left. Typically pre-buying would
happen only in March 2017; at the last minute, he added. Describing transporters as good
managers who got around to managing the cash crunch, Mehta averred, A CV buyer was
more likely to postpone his purchase. He would rather concentrate on purchasing only
what is essential.
Apart from pan-India BSIV emission norms implementation in April 2017, GST is also
expected to be implemented in early FY2017-18. Fuel prices in the International markets
are showing a tendency to rise. The value of Indian Rupee may fall in the short to medium
term. The US Fed rates are also showing an inclination to rise. This is certain to reflect on
the Indian economy, of which the transport industry is a part. The transport industry
accounts for an estimated 5.5 per cent of the countrys GDP. If good sales growth of
October 2016 indicated that the industry sentiment was changing for the better, the sales
numbers in November 2016 seem to paint a different picture altogether.
The Society of Indian Automobile Manufacturers (SIAM), in its report for November
2016, announced that 1,563,665 automobiles were sold in the country, down (-) 5.48 per
cent, as compared to 1,654,407 vehicles sold in the corresponding month last year. In
November 2016, 45,773 commercial vehicles were sold, down (-) 11.58 per cent, as against
51,766 CVs sold during the same period last year. M&HCV sales were 17,499 per cent in
November 2016, down (-) 13.13 per cent, as against the sale of 20,144 units in November
2015. In November 2016, 28,274 LCVs were sold, down (-) 10.59 per cent, when compared
to 31,622 units sold in November 2015. Optimistic, Mehta is confident of demonetisation
being a temporary phase. Opined Anuj Kathuria, President Global Trucks, Ashok
Leyland Ltd., The (market) environment is so volatile that saying anything does not
mean much because we dont know which way the market is going to swing. The general
expectation, he mentioned, is that there will be a pre-buying demand. It may get
dampened by demonetisation however. The effect of demonetisation on the CV industry
in 2017 will be tough to determine, an industry expert claimed. He claimed further that
growth will shift further. In case it does, the CV industry will have to wait longer to reach
peak levels once again.
The slowdown effect
Hopes about pre-buying continue. In an uncertain environment however, claimed an
industry source, it will be the performance of the manufacturing and agricultural sectors
that will reflect on the performance of the transport industry. Disruption in supply chain
is a matter of concern for the industry already. Stated an industry source, that the Indian
(Purchase Manager Indiex) PMI for November 2016 decreased to 52.30 in November over
54.40 in October 2016. Queues in front of banks and ATMs continued in December 2016.
Demonetisation, claimed an industry source on the condition of anonymity, has shaken
the confidence of consumers. They are no longer willing to spend as much. The situation
in rural India is bad, he added.
In an interview, Ravi Pisharody, Executive Director, Commercial Vehicles, Tata
Motors, is known to have said that the number of inquiries to buy new trucks have almost
disappeared. He is also known to have expressed that truckers will eventually get used to
cashless ways. Demonetisation, it is clear, has affected the cyclicity of the CV market.
Trucks under contract are operating but the same is not the case with those who operate
on load-availability basis. This has had a clear effect on the need to buy a new truck. In
the case of buses, the urgency to buy a new bus is also expected to take a beating. The
amount of people movement has gone down, claimed an industry expert.
Uncertain times
Growing on a small base (the bus segment accounts for 20 per cent of the Indian CV
industry), the bus segment has seen good orders from government transport bodies in
recent times. In the case of private players, the goings choppy. Said K T Rajshekhara,
CEO, S.R.S. Travels, Our flow chart is getting curtailed as people are curtailing travel due
to the money crunch. Pisharodys comment that there is a lot of uncertainty because the
pipeline is not moving at all assumes importance at this juncture. Claimed an industry
source that big orders will take time to fulfill. The segment base may not expand
drastically therefore. Growth, sources said, could emerge only in the second half of next
fiscal. The Union Budget, scheduled for February 01, 2017, is expected to provide some
relief. How much of that will touch the CV industry will need to be seen. Any expectation
of the CV industry reaching peak levels of FY2011-12, it looks like, will now take longer.
Pisharody is known to have said that he expects the CV market to regain its peak in
FY2018-19.
Optmistic ever
Optimism is keeping the CV industry going. Said Mehta, If the country will grow, the
CV industry will grow. If you produce, you have to transport. Policies in this have a limited
role to play. The need is to transport. Road transport will continue to play a role in the
growth of the country. If one believes in the India story, he or she has to believe in the CV
story. GST may change the structure of transportation, but it will not hamper the growth
of the CV industry. India is a growing economy, and the CV industry will have a good
future, he mentioned. Transporters may defer their decision to purchase CVs, they will
however come back, claimed an industry source, when they see even a slight improvement
in the economic situation. In FY201516, the CV industry grew by
12 per cent. M&HCV segment grew double digit at 30 per cent. LCV segment was
almost flat, and registered a growth of 0.30 per cent. The amount of growth the CV
industry records in FY2016-17 will set the tone for the future. In its latest report on Mega
trends shaping the Indian commercial vehicle market, Ernst & Young said that the Indian
commercial vehicle market will double to 1.6 million units in the five years starting
FY201617. This will be in-line with the increase in infrastructure spend, rapid
urbanisation and entry of major multinational players in the country. Pisharody is known
to have expressed, that in terms of quarterly peaks, one should start seeing it from the
second half of the next year. The benefits will start coming in the second half of FY2017-
18 and the real growth and good impact will come in FY2018-19. The reason, according
to him, is the settling down of the dust kicked up by BSIV emission norms. The effect of
what is termed as demonetisation is certain to spring up new challenges. The situation
will become clear as the year progresses. Transporters would also get to know as the year
progresses. As new norms take shape, transporters would need to learn to handle their
CVs; to address their servicing needs, and more.