INDIAN COMMERCIAL VEHICLE SECTOR : TRENDS & OUTLOOK

July 2010

ICRA Limited

Indian Commercial Vehicle Sector: Trends & Outlook

July 2010

Trends in the Key Demand Drivers

Industrial upturn and improved financing environment driving demand in the M&HCV segment
The key indicator for underlying demand for the CV sector the index of industrial production (IIP) has been improving steadily Much of the demand recovery in the M&HCV segment has been driven by stronger economic activity and improved operating environment for fleet operators Financing availability has improved substantially and interest rates have come down to 11-12% (for M&HCV financing) Improving highway infrastructure & intra-city roads is supporting increase in share of roads in freight transportation
Chart: Trend in M&HCV volumes maps IIP growth
270% 220% 170% 120% 70% 20% Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 -30% 20%

Trend in M&HCV Sales and IIP Growth (%)

17%

14%
11% 8%

5%
2% -1%

-80%

-4%

M&HCV Growth (%) Source: ICRA Estimates

IIP Growth (%)

ICRA Limited

Indian Commercial Vehicle Sector: Trends & Outlook

July 2010

Trends in the Key Demand Drivers

Improved financing environment driving growth in CV segment
Operating environment for fleet operators has been improving owing to lower repayment burden as a result of lower interest rates and longer loan tenors Disbursal levels among CV financiers have started increasing gradually and delinquency levels , which had increased sharply during the past 4-5 quarters, are showing signs of stability Competition among financiers is intensifying again; however funding for first time user (FTU) segment remains constrained Loan-to-Value (LTV) ratios have improved particularly for the large fleet operators in the M&HCV segment with credible track record

Chart: Trend in CV financing rates

20.0% 18.0% 16.0%

Trend in Cost of CV financing

IRR

14.0%

12.0%
10.0% 8.0% Oct-08

Jun-09

Jun-08

Dec-07

Feb-08

Apr-08

Dec-08

Feb-09

Apr-09

Oct-09

Dec-09

Feb-10

Aug-08

Average CV Financing Rates

Source: ICRA Estimates

ICRA Limited

Indian Commercial Vehicle Sector: Trends & Outlook

Aug-09

Apr-10

July 2010

Trends in the M&HCV Segment

Growth momentum continues to remain strong in the M&HCV
Growth in the M&HCV continues to remain strong; Current year started with 95% YoY growth at 45,219 units till May 2010 driven by strong growth in the cargo segment The tractor trailer segment has been driving growth in this segment During the downturn, ALL lost some market share owing to relatively weaker demand in Southern region (its strong foothold) and inventory build up. However, with pick up in demand in South and inventory correction, ALL has gained market share in the last 4-6 months Growth likely to remain strong in the near term; some pre-buying also expected ahead of changes in emission norms
ICRA Limited
Trend in Domestic M&HCV Sales YoY (%)
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 248% -31% -8% 4% 0% 133% 64% 198% 117% 79% 103% 88% 300% 250% 200% 150% 100% 50% 0% -50% -100%

-42% -38%

May-09

YoY Growth (%) RHS

Exhibit 1: Trend in Market Share in Domestic M&HCV - Goods M&HCV - Goods Q1 2009-10 Q2 2009-10 Q3 2009-10 Q4 2009-10 FY 2009-10 YTD 2010-11 Tata Motors 71.4% 66.5% 66.8% 60.9% 65.9% 60.2% Ashok Leyland 14.2% 19.5% 18.5% 24.4% 20.2% 25.3% Eicher 10.1% 9.6% 9.5% 9.3% 9.5% 10.5% Others 4.3% 4.4% 5.2% 5.4% 4.5% 4.0%

Exhibit 2: Trend in Market Share in Domestic M&HCV Segment - Passenger M&HCV - Passenger Q1 2009-10 Q2 2009-10 Q3 2009-10 Q4 2009-10 FY 2009-10 YTD 2010-11 Tata Motors 56.4% 47.5% 48.1% 53.9% 51.3% 51.7% Ashok Leyland 29.6% 39.0% 43.1% 37.9% 38.1% 34.3% Eicher 7.3% 6.3% 2.8% 3.2% 4.5% 7.8% Others 6.8% 7.2% 6.0% 5.1% 6.1% 6.2% Source: SIAM, ICRA Estimates

Indian Commercial Vehicle Sector: Trends & Outlook

May-10

Apr-09

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Sep-09

Dec-09

Feb-10

Mar-10

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Oct-09

Jan-10

July 2010

Trends in the LCV Segment

Similar trends visible in the LCV segment as well
Growth in the LCV also continues to remain strong; Current year started with 40% YoY growth at 52,447 units till May 2010 driven by growth across sub-segments The demand in the cargo segment (above 3.5T) has also picked up since October 2009 unlike the sub 1T segment, which has posted stable growth all through the year Tata Motors continues to remain market leader; however M&M has strengthened its position driven by better performance of its Pick up segment The sub 1T segment likely to witness increasing competitive pressure with the launch of M&Ms Maxximo
ICRA Limited
Trend in Domestic LCV Sales YoY (%)
35,000 30,000 25,000 20,000 15,000 10,000 5,000 123% 13% 43% 28% 32% 75% 28% 12% 10% 90% 66% 46% 42% 38% 140% 120% 100% 80% 60% 40% 20% 0%

Jun-09

Oct-09

Jan-10

May-09

Mar-10

Jul-09

Sep-09

Aug-09

Feb-10

Apr-09

Apr-10

YoY Growth (%) RHS

Exhibit 3: Trend in Market Share in Domestic LCV Segment - Goods LCV - Goods Q1 2009-10 Q2 2009-10 Q3 2009-10 Q4 2009-10 FY 2009-10 YTD 2010-11 Tata Motors 61.7% 61.6% 58.9% 55.4% 58.9% 54.4% M&M* 29.6% 29.5% 31.8% 35.6% 32.1% 37.7% Others 8.8% 8.9% 9.3% 9.0% 9.0% 7.8% Exhibit 4: Trend in Market Share in Domestic LCV Segment - Passenger LCV - Passenger Q1 2009-10 Q2 2009-10 Q3 2009-10 Q4 2009-10 FY 2009-10 YTD 2010-11 Tata Motors 56.1% 54.3% 53.8% 57.6% 55.7% 61.6% M&M* 19.5% 15.5% 13.0% 10.1% 14.6% 10.4% Force 11.7% 18.4% 18.1% 19.4% 16.8% 14.0% Others 12.7% 11.7% 15.0% 13.0% 12.9% 14.0% Source: SIAM, ICRA Estimates, *including MNAL

Indian Commercial Vehicle Sector: Trends & Outlook

May-10

Nov-09

Dec-09

July 2010

Trends in the Key Demand Drivers

Freight volumes have picked up during the last few quarters
Growth is driven by pick up across most sector particularly in the movement of heavy materials steel, cement etc. With improvement in exports, demand for containers at ports has also picked up Freights rates originating from Southern Region have witnessed an improvement of almost 10% in the recent period; while those from North still remain flat

CV prices likely to move up post implementation of BSIII/IV norms

Based on our discussion with industry, we expect CV prices would move up by 45% post implementation of new emission norms in October 2010 As a result, some pre-buying is expected ahead of the implementation OEMs may have to absorb part of the cost if underlying demand deteriorates from hereon The conversion from BS III to BS IV will be higher in the LCV & bus segment as some these vehicles get registered in the top 13 cities In the truck segment, conversion will be mostly from BS II to BS III

ICRA Limited

Indian Commercial Vehicle Sector: Trends & Outlook

July 2010

Emerging Trends in the CV Sector

Shift towards higher tonnage vehicle in M&HCV segment
Increasing preference for higher tonnage vehicles is supported by improving highway infrastructure and connectivity; allow faster turnaround time Extent of overloading is reducing especially on the longer routes Changing mindsets of fleet operators prefer faster turnaround time than overloading

LCV segment seeing polarization towards the sub 1T segment; demand also shifting away from traditional three-wheeler segment to this segment Engine Power/tonnage ratios are improving gradually
With improving road infrastructure, engine power/tonnage ratios are improving OEMs are introducing higher powered vehicles with better cabin ergonomics & comfort levels

ICRA Limited

Indian Commercial Vehicle Sector: Trends & Outlook

July 2010

Key Inputs from the Channel Check

Demand across segments of the CV segment continues to remain strong The growth is more pronounced in the tractor trailers (in M&HCV segment) driven by improvement in port activity and transportation of heavy materials The tipper segment (in low end segment) is also witnessing growth driven by demand from the infrastructure sector The demand for high-end tippers (used primarily) in the mining segment is also seeing revival Availability of finance and decline in interest rates have supported demand Loan to value ratio have gone up (~95%, chassis) for operators with credible track record Production levels at OEMs have been constrained due to shortage of components mainly tyres, and fuel injection systems Demand is likely to remain strong in M&HCV (truck segment) in the current year; while in bus segment like to be lower as orders (under JNNURM) fueled growth in the previous fiscal Some pre-buying is expected ahead of change in emission norms (w.e.f October 2010) Higher tonnage vehicles are gaining traction with improvement in road & highway infrastructure; fleet operators are showing interest for new platforms such as World Truck to operate on certain key routes

ICRA Limited

Indian Commercial Vehicle Sector: Trends & Outlook

July 2010

Trends in Developed Markets

Trend in CV Sales in Europe

3,000,000 4% 2% 6% -9% -32%

Trend in Traditional CV Sales in U.S & Canada

10% 5% 0% -5% -10% -15% -20% -25% -30% -35% 500,000 400,000 300,000 20% 10% -30% -23% -26% 30% 20% 10% 0% -10% -20% -30% -40%

2,500,000
2,000,000 1,500,000 1,000,000 500,000 2005 2006 2007

200,000
100,000 2005 2006 2007 2008

2008

2009

2009

Europe CV Sales

YoY Growth (%) - RHS

U.S. Traditional Market Sales

YoY Growth (%) - RHS

Source: ACEA, Europe include EU27+EFTA

Source: Industry Estimates, Company Presentations Volumes include Class 6-8 trucks + School bus data

Europe Outlook remains weak Witnessed a sharp drop in volumes in CY2009 over the previous year; however the impact of inventory destocking appears to be over as production levels have started to pick up Nevertheless the outlook continues to remain weak; volumes continue to drop in YTD CY2010 USA Outlook is improving with initial signs of recovery Posted one of the lowest sales in CY 2009 (almost 70% lower from than peak of CY2006) The segment is however showing signs of demand revival as visible from the increase in production from Q2 CY2009; Replacement demand is expected to be the significant growth driver, given the average age of the fleet is very old, almost close to 7 years

ICRA Limited

Indian Commercial Vehicle Sector: Trends & Outlook

July 2010

Competitive Landscape
M&M (through JV with Navistar) is expected to enter the M&HCV segment in the current year; would add capacity of 50,000 units at a steady level M&Ms in-depth understanding of the Indian market, established vendors (to achieve high level of localisation) and extensive marketing & distribution reach is likely to increase the competitive pitch in the CV space International OEMs i.e. Volvo, Daimler, MAN (along with Force Motors) are also increasing their foothold in the CV segment Ashok Leyland is expected to start commercial production from its tax-exempt facility; JV with Nissan for LCVs still couple of years away Some of the product launched by AMW in the heavy segment have also met with initial favorable response in the market place The sub 3.5T LCV segment is also witnessing new entrants. Piaggio and M&M have launched products in this segment Localization, key to achieving cost competitiveness, would be a challenge for a new entrant due to low initial volumes While some fragmentation of the market share can be expected over the medium to longer term, established large players would continue to enjoy the benefits of scale, brand image, established vendor base and distribution/ service network.
ICRA Limited Indian Commercial Vehicle Sector: Trends & Outlook July 2010

Financial Performance of Key Players

Tata Motors TMLs standalone performance has improved substantially post Q4FY09 with the pick-up in the domestic CV sector, successive price increases undertaken, control on costs and supported rendered by its passenger vehicle business However, in Q4FY10 with product mix skewed towards lower margins product and possibly impact of rising material prices impacted operating margins Net profits in Q4FY10 was supported by gain on sale of 20% stake in Telcon to Hitachi Ashok Leyland ALL was particularly hit during the downturn as the decline in the higher tonnage vehicles was much higher than the lower tonnage vehicles; higher dependence on the southern region also impacted performance Subsequently, with strong recovery in volumes coupled with lower material costs, successive prices increases (~5%) and strong control on working capital has helped the company report strong performance in last nine months of FY10
ICRA Limited
Trend in Tata Motor's Financial Performance
Amount (in Rs. Millions)
140,000 120,000 100,000 80,000 60,000 40,000 20,000 Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10 Operating Income OPBDIT OPBDIT/OI (%) PAT/OI (%) - RHS 15.0% 10.0% 5.0% 0.0% -5.0% -10.0%

Source: Company Releases, ICRA Estimates

Trend in Ashok Leyland's Financial Performance

Amount (in Rs. Millions) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10 Operating Income OPBDIT OPBDIT/OI (%) PAT/OI (%) - RHS 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Source: Company Releases, ICRA Estimates

Indian Commercial Vehicle Sector: Trends & Outlook

July 2010

Financial Performance of Key Players

Eicher Motors Inline with other players, strong growth in volumes coupled with better product mix (higher HCV sales) and prices increases undertaken by the company in the current fiscal has helped Eicher to post strong improvement in operating margins in the last quarter The dip in Q3FY10 was largely on account of one-time write-offs (development expenses for new engines/platform) undertaken by the company post alignment of vehicle platforms with Volvo Swaraj Mazda Swaraj Mazdas operating margins continue to be in the 6-8%, relatively lower than other players given the moderate scale of operations and significant level of outsourcing SML has particularly benefitted by higher volumes (in Q3 FY10 & Q4 FY10) on account of pre-buying by schools ahead of changes in emission norms given its high dependence in the buses segment that operate within city limits

Trend in Eicher Motor's Financial Performance

12,000 10,000 8,000 6,000 4,000 2,000 (2,000) 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Amount (in Rs. Millions)

Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10 OPBDIT OPBDIT/OI (%)

Operating Income

PAT/OI (%) - RHS

Source: Company Releases, ICRA Estimates

Trend in Swaraj Mazda's Financial Performance

Amount (in Rs. Millions) 2,500 2,000 1,500 1,000 500 (500) 20.0% 10.0% 0.0% -10.0% -20.0%

Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10 OPBDIT OPBDIT/OI (%)

-30.0%

Operating Income

PAT/OI (%) - RHS

Source: Company Releases, ICRA Estimates

ICRA Limited

Indian Commercial Vehicle Sector: Trends & Outlook

July 2010

Outlook
Medium to long term outlook for the industry remains robust supported by healthy economic outlook and infrastructure investments In the near term, impact of emission related pre-buying and high base effect (H2, FY10) may impact volume growth numbers Some of the cost reduction during periods of sharp volume declines (H2, FY09 H2, FY10) is gradually getting rolled back, with wage hikes across the industry (including component suppliers); also capacity constraints are increasing the bargaining power of component suppliers in some segments; the channel inventory is likely to remain tight Cost pressures include tightening emission/safety norms; higher power to weight ratio and rising performance expectations In the longer term freeing of diesel prices may bring in greater volatilities on freight operators costs OEMs to increase focus on fuel economics Investments in capacities and entry of new players to increase competitive pressures; pricing power of OEMs to remain under pressure Growth likely to be higher in the upper band of M&HCVS (> 16T) and lower band of LCVs (< 3.5T) ICRA estimates M/HCV growth rates to be in the region of 9.5-11.5% over 5 year time frame; the LCV growth rates could be marginally higher supported by volume in the low tonnage segment
ICRA Limited Indian Commercial Vehicle Sector: Trends & Outlook July 2010

Annexure: ICRAs Ratings on Commercial Vehicle Companies

Companies Ashok Leyland Limited Eicher Motors Limited

Long-Term Ratings LAA- (Stable) LAA- (Stable)

Short-Term Ratings A1+ A1+

Mahindra & Mahindra Limited

Swaraj Mazda Limited Tata Motors Limited

LAA+ (Stable)
LA+ (Stable) LA+ (Positive)

A1+
A1+ A1+

Mahindra Navistar Automotive Limited LA+

VE Commercial Vehicles Limited

LAA -

A1+

ICRA Limited

Indian Commercial Vehicle Sector: Trends & Outlook

July 2010

Analyst Contacts
Analyst Chennai Pavethra Ponniah V Srinivasan K Srikumar Delhi Anupama Arora Jitin Makkar Mumbai Subrata Ray Shamsher Dewan E-mail Id Tel:

pavethrap@icraindia.com +91 44 45964314 vsrinivasan@icraindia.com +91 44 45964315 ksrikumar@icraindia.com +91 44 45964314

anupama@icraindia.com jitinm@icraindia.com

+91 124 4545303 +91 124 4545368

subrata@icraindia.com +91 22 3047 0027 shamsherd@icraindia.com +91 22 3047 0037

ICRA Limited

Indian Commercial Vehicle Sector: Trends & Outlook

July 2010