CV makers stare at flat run for heavy vehicles

Commercial vehicle manufacturers remain cautious as demand for medium and heavy commercial vehicles (M&HCVs) is likely to remain flat during the second half of the fiscal on slowing industrial activity and rising fuel and interest rates.

The auto industry has already faced a dismal first half with car makers posting a decline in sales.

However, the CV makers continued to see strong demand mainly because of light commercial vehicles (LCVs) sales. But M&HCV sales remained subdued due to high diesel prices and interest rates.

According to Society of Indian Automobile Manufacturers (Siam), while the overall CV segment grew 17.80% during April-August 2011 as against the year-ago period, M&HCVs grew just 7.07%.

Experts say the M&HCV demand will largely depend on the buying by fleet operators and individual truck owners. Transporters who buy a large chunk of CVs through bulk orders are in no hurry to expand their fleets at the moment, they said.

Vineet Agarwal, executive director, Transport Corporation of India, said, “We don’t expect CV sales to grow beyond 5-10%. The main reason for this is the fact that a good amount of fleet addition has already taken place in the past two years. In addition, interest rates have increased and the traffic movement expectation is also not very high. The capacity addition would be both through bulk deals and standalone purchases. Bulk deals will depend on the size of contracts that come across, while standalone purchases would be mostly for upgrading from a smaller truck to a bigger one.”

On the other hand, the freight rates have not grown in the past few months. According to the fleet operators, freight rates fell in April-June, but have started rising from July following a good agricultural crop and rise in diesel prices.

A September 7 report by UBS by Sonal Gupta and Deepa Mirchandani includes key findings from transporters based in Mumbai and Delhi. “The markets are expected to remain weak till December 2011 with less expectation of recovery during the festive season. Transporters expect used truck prices to strengthen as people can generate similar cash flow with lower capital investment.”

Overall, CV dealers expect market demand to remain flattish year on year for the next 5-6 months. Some dealers expect recovery from November-December with some potential support from original equipment makers in form of higher discounts and some interest rate subvention from financiers,” said the report.

According to a Tata Motors dealer, “The demand for commercial vehicles on all-India level is weak. Maharashtra is doing fairly well due to regulations related to replacement of eight-year-old trucks. Segments like tippers and multi axles are doing well, while tractor trailers and container movement has slowed down. Second half can be equally bad for the industry.”

He said that individual vehicle owners are not buying vehicles due to high interest rates. Whatever little buying is happening is through bulk orders, that too for fleet replacement. Currently, about 65% of CV sales are by single individual truck owners, with rest coming from large fleet operators.

Ashok Leyland did not respond to queries, while Tata Motors, which hold almost 50% market share said, “In FY 2011-12, as of August 31, 2011, Tata Motors’ commercial vehicles growth in the domestic market is at 196,887 numbers, a growth of 17% over last year and M&HCV sales stood at 78,079 numbers, a growth of 8% over last year. Going forward, we need to watch for some more months before we can be more conclusive on the market growth. Interest rates are a concern at this point time. We will wait and watch.”

“Growth is negative for the leading players — Tata Motors and Ashok Leyland. We believe a recent mining ban in Karnataka and slowdown in industrial activity will result in weak IIP growth and CV demand,” said the UBS report.