ICRA RESEARCH SERVICES

Corporate Ratings

Indian Commercial Vehicle Industry

Initial signs of stability but demand recovery still few quarters away

ICRAGhosh
RATING FEATURE
Anjan Deb
+91 22 3047 0006
aghosh@icraindia.com
Contacts:
Subrata Ray
+91 22 3047 0027
subrata@icraindia.com
Shamsher Dewan
+91 124 4545 328
shamsherd@icraindia.com
Ashish Modani
+91 020 2556 1194
ashish.modani@icraindia.com

Whats Inside
Executive Summary
Special Feature:
The LCV Growth Story: Is it built to last?
Structurally favorable growth drivers remain intact
Economic Growth & Improving Urbanization
Proliferation of the Hub-n-Spoke model
Relatively untapped semi-urban and rural markets
Supportive Financing Environment
Replacement Demand
Emergence of small commercial vehicles

LCV Segment: Product Portfolio Analysis

Competitive Landscape: Interesting times ahead as new OEMs join the bandwagon
Segmental Analysis of key segments of the Industry
Company Update
Tata Motors Limited
Ashok Leyland Limited
Eicher Motors Limited
SML Isuzu Limited

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INDIAN COMMERCIAL VEHICLE INDUSTRY

Initial signs of stability but demand recovery still few quarters away
Quarterly Update April 2014

ICRA RESEARCH SERVICES

Executive Summary
CV industry going through one of its longest down cycles

ICRA RATING FEATURE

The domestic commercial vehicle (CV) industry is currently going through one of its longest down cycles in recent periods. Having witnessed a decline of 2% in 2012-13, the
industry volumes have contracted by a sharp 19.7% in 11m 2013-14. As a result of slowing economy, sluggish industry activity, surplus capacity in the trucking system and
weak viability for fleet operators, the demand for M&HCV has fallen for 24 consecutive months with industry volumes currently at 40% of the peak (i.e. 350,000 units)
achieved in 2011-12. The impact of slowing economy and weak consumer sentiment has also had a trickle down impact on the demand for LCVs, which shrunk by 16.6%
during 11m 2013-14. Unlike the previous slowdown, the subdued demand appears to be uniform across segments of the industry. For instance, while the demand for the
higher tonnage category of trucks such as tippers, tractor trailers and multi-axle vehicles (MAVs) has shrunk by 26.6% during the period, the sales of Intermediate
commercial vehicles (ICVs) has also contracted by 26.5% during the same period. In absence of meaningful orders from STUs and weak demand from private carriers, the
demand for buses, which is otherwise considered to be less cyclical has also been a declining trend during this phase.

Reality Check: Freight rates have started improving; suggests likely bottoming out
From fleet operators perspective, the operating environment over the past 6-8 quarter has been characterized by low freight availability, under utilization of fleet (as a
result of surplus capacity in the trucking system) and steadily rising operating costs in wake of gradually rising diesel prices. Besides increase in fuel costs, the earnings of
fleet operators have also been facing cost pressures on account of rising driver salaries, toll charges and overall repair & maintenance of vehicles. The increase in some of
these costs is generally not a pass through for fleet operators, which along reduced trips per month has put pressure on viability of fleet operators. While macro
environment overall continues to be subdued, the recent trend in freight rates however suggests that fleet operators are now able to pass on the rise in diesel costs. For
instance, freight rates on key routes across the country have risen between 9-10% in YTD FY14 compared to 14% rise in diesel costs. Adjusted for fuel consumption, the rise
in freight rate appears to be commensurate with the hike in diesel prices. In addition, our channel check with industry participants also suggests that the stress levels in the
asset quality indicators of financiers have stabilized. Given the high repossession rates over the past few quarters, financiers have also been exercising stringent lending
norms while looking at incremental business.

M&HCVs: Demand may start improving from H2 2014-15 onwards

We expect the domestic CV industry to close 2014-15 at 636,000 units, reflecting de-growth of 19.7% over the prior year. At this level, the industry volumes would be lower
than industry size in 2010-11. However, the sales volumes in the M&HCV segment would actually be lower than what they were in 2004-05 (the industry slowdown in
2008-09, which resulted in lower volumes was largely prompted by global financial crisis and not so much by domestic factors). Thus, given the low base and some
replacement demand owing to ageing of existing fleet, we expect M&HCV sales to start showing signs of recovery from H2 2014-15 onwards. The extent of improvement
will however be muted as a) surplus in the trucking system, b) sharp rise in repossession of vehicles over the past few quarters and c) drop in prices of second-hand
vehicles would act as deterrent for new CV demand. Accordingly we expect M&HCV sales to grow marginally (i.e. between 2-3%) in 2014-15 with growth largely skewed in
favour of H2. Overall, a meaningful recovery in M&HCV volumes remains dependant on pick-up in industry activity, investment cycle and infrastructure and mining related
activities. The likelihood of favorable trend in these areas may only emerge post the outcome of General Elections in May 2014. The bus segment could grow at a faster
pace as it will start seeing benefits of the budgetary allocation towards JNNURM with specific plan to add 10,000 buses. In ICRAs view, the proposed order will be spread
over the next two years and contribute significantly (~8%) to M&HCV bus sales in each of the next two years.

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The LCV Growth Story remains supported by structurally favorable growth drivers but near-term pain persists
The Light Commercial Vehicle (LCV) segment had also been in the grip of a sharp slowdown since the beginning of 2013-14. After having achieved a CAGR of 27% over the
past five years (FY09-13), the segments volume de-grew by 16.6% in 11m 2013-14. The impact of slowing economy and weak consumer sentiment has also had a trickle
down impact on LCVs apart from steady growth that the segment has witnessed over the past several years. As the slowdown in LCVs has been a recent phenomenon
unlike M&HCVs, we expect further contraction in the near-term. However, driven by certain structurally favorable factor, the segments growth prospects over the
medium-term remain intact. Some of the factors that are likely to propel demand for LCVs include a) further proliferation of Hub-n-Spoke logistics model, b) relatively
untapped potential in semi-urban and rural areas and c) improving urbanization levels. The emergence of SCVs also provided attractive employment opportunities for FirstTime Buyers (FTBs), which along with an established financing market will also support demand for LCVs. Accordingly, we expect demand for LCVs will grow at CAGR (%)
10-12% over the medium-term. We are also of the view that competition in LCVs is set to rise as new OEMs enter the market. With some of them being established OEMs
with deep understanding of the Indian market, the competitive landscape is likely to get formidable.

Competitive Landscape: Interesting times ahead as new OEMs enter LCV segment and others launch refreshed models in HCVs
The fiscal 2012-13 was marked by a market share loss for industry leader, Tata Motors, especially in the M&HCV segment as some of the other OEMs managed to offset
the impact of slowdown to some extent with wider model offerings and increasing footprint in markets where Tata Motors commands a very strong position. Among the
key OEMs, Volvo Eicher (VECV) gained market share (albeit on a low base) on back of increasing acceptability in the heavy-duty trucks and buses segment, while Ashok
Leylands expanding market coverage outside the Southern region also helped in countering the impact of slowdown to an extent. However, the market share trends
visible in FY13 has seen bit of a reversal in 10m FY14 with Tata Motors gaining back market share in the M&HCV segment while losing close to 890 bps in the LCV segment.
Such fluctuations in market share over the short-term usually reflect the impact of each OEMs strategy with regards to discounts, trend in inventory levels and response to
new model introductions. In the LCV segment, an increasing preference for 2-3.5t vehicles (predominantly Pick-Up Trucks) also explains the reasons for market share
traction in favour of Mahindra & Mahindra given its strong product portfolio of Pick-Up trucks. Despite muted environment, OEMs have sizeable new model introduction
plans over the near-term. Most of the OEMs are likely to introduce their relatively advanced trucking platform across both LCVs and HCVs over the near-term. As some of
the new entrants expand their product portfolio, sales network and also established a brand loyalty in the minds of the trucking community, the competitive intensity is set
to rise. Among the recent entrants, Bharat Benz managed to sell 6,500 trucks in the Indian market during CY 2013, which makes it the fourth largest player in the M&HCV
segment in India. Given the subdued market condition and limited touch points, the companys performance is fairly commendable in our view. We are also of the view
that competitive intensity in the SCV segment is also set to rise as some of the entrants either have deep understanding of the Indian market or have large scale globally in
LCVs with experience of operating in markets that are similar to India.

Profitability Indicators: Bargaining power of OEMs unlikely to improve until M&HCV demand recovers meaningfully
The profitability indicators of CV OEMs have been on a declining trend since the beginning of 2012-13 owing to sharp drop in CV sales and consistently rising discount levels
prevailing in the market. In our estimates, while EBITDA margins of CV OEMs dropped by almost 300 bps to 8.4% in 2012-13, the extent of drop has been sharper during
the current year, as reflected by losses at EBITDA level for the few players. Given the ongoing slowdown, OEMs have also taken marginal price increase over the quarters
and implemented several measures to curtail costs by rationalizing manpower and other overheads. However, these measures have not helped to a great extent as
discount levels continue to remain at elevated level. Further, capacity utilization of CV OEMs has fallen sharply for second consecutive year. We believe that even as
growth momentum in the domestic CV industry may start improving from H2 2014-15 onwards, the profitability indicators of CV OEMs are unlikely to follow a similar trend
in view of a) restricted bargaining power in wake of competition, b) likely increase in expenses related to new model launches and c) pressures on employee costs as
several OEMs have announced substantial wage hikes. Accordingly, a meaningful recovery in M&HCVs sales will be critical for industrys earning trajectory to improve
going forward.

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Having concluded capacity expansion plans over the past couple of years, CV OEMs are currently investing in developing new products, engine technologies and even
pursuing diversification plans in other sectors. Most of the investments plans at present are not associated with capacity expansion (barring debottlenecking or
investments for new product categories) and are continuing as per plans. For some of the OEMs, the investment plans are sizeable and in view of weak cash flow
generation would require funding support to maintain a stable credit profile.
Exhibit 1: Trend in Domestic Commercial Vehicle Volumes & Growth Rates by segments
Domestic Commercial Vehicle Sales (in Nos)
2008-09 2009-10 2010-11 2011-12 2012-13
11m FY14
LCVs
Passenger Segment
26,952
34,413
44,816
48,868
48,153
37,795
Goods Segment
173,747
253,364
317,030
411,415
476,734
353,650
Total LCV Sales
200,699
287,777
361,846
460,283
524,887
391,445
M&HCV
Passenger Segment
Goods Segment
Total M&HCV Sales

YoY Growth (%)

2010-11 2011-12

2008-09

2009-10

-3.2%
-7.6%
-7.0%

27.7%
45.8%
43.4%

30.2%
25.1%
25.7%

2012-13

11m FY14

9.0%
29.8%
27.2%

-1.5%
15.9%
14.0%

-11.2%
-17.1%
-16.6%

34,892
148,603
183,495

43,083
201,861
244,944

47,938
275,121
323,059

49,882
299,334
349,216

46,553
221,710
268,263

34,362
142,830
177,192

-9.7%
-37.0%
-33.2%

23.5%
35.8%
33.5%

11.3%
36.3%
31.9%

4.1%
8.8%
8.1%

-6.7%
-25.9%
-23.2%

-16.3%
-27.9%
-25.9%

Total CV Sales
384,194
Source: SIAM, ICRA Estimates

532,721

684,905

809,499

793,150

568,637

-21.7%

38.7%

28.6%

18.2%

-2.0%

19.7%

Whats inside?
The LCV Growth Story: Is it built to last?
Segment-wise performance trends in the domestic commercial vehicle industry

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ICRA Contact Details

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KOLKATA
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PUNE
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Pune-411 020
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25560195/196,
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E-mail: shivakumar@icraindia.com

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