CV sales pick up but analysts don't bet on manufacturers' optimism

After reporting a 70-75 per cent fall in sales for the first half of FY21, sales of commercial vehicle (CVs), considered a reliable economic bellwether, have started picking up. But can the sector pull out of the rut it has been in over the past two years?

Before the pandemic, the economic slowdown, drying up of infrastructure projects and new axle load norms that allowed truck owners to increase vehicle loads 20 to 25 per cent (effectively endorsing overloading) saw the sector shrink (see chart).  

The current “recovery” is a modest one. In the July-September quarter, CV sales fell 20 per cent to about 133,000 units from 167,000 units in the same period last year. But manufacturers see good news in the month-on-month recovery, with sales recording a 32 per cent growth in September over August. In October, sales were just 4 per cent below October 2019 volumes.

“The unlocking of the economy, principally in manufacturing, is the key driver,” said Girish Wagh, president, Commercial Vehicle Business Unit, Tata Motors, India’s largest CV manufacturer. Tata Motors’ CV sales in October were flat on a y-o-y basis but up 12 per cent up over September 2020.

The revival in manufacturing is reflected in the Purchasing Managers’ Index (PMI), a key indicator of demand, which rebounded from an ultra-low of 27.4 in April (during the lockdown) to 58.9 in October (a reading above 50 is considered an expansion). The eight core industries index has also recovered: after contracting around 38 per cent in April, it is now showing a contraction of just 0.8 per cent.

The recovery in core industries and resultant manufacturing output have increased freight demand for transporters, which in turn has supported CV sales. Interestingly, the demand is largely driven by light commercial vehicles (LCVs). The share of LCVs (typically below 7.5 tonnes) accounted for 82 per cent of CV sales in the first half of FY21, from 69 per cent in the whole of FY20. Within this, intermediate commercial vehicles (ICVs), which accounted for one-fourth of the total industry volume last year, now accounts for about a third, a major shift in the pattern of demand.

Much of this changing demand pattern has been driven by strong growth in e-commerce as work-from-home and social distancing norms have expanded demand for online purchases, especially of essentials. At the same time, a good monsoon has meant strong demand for CVs from the agricultural sector to transport fruit, vegetable and cereal harvests. The festive season is expected to accelerate demand, too. “Sentiments are improving fast as the festive season kicks in,” said Vipin Sondhi, managing director and chief executive officer, Ashok Leyland. Ashok Leyland is the country’s second largest CV manufacturer.

The confidence also comes from the fact that the mining sector has opened up, especially post-monsoon, and the latest reports indicate that residential realty sales have also picked in the second quarter, both of which should stoke demand of medium and heavy commercial vehicles, especially tippers. The release of contractors’ payments has improved the liquidity position of these players, which could see more construction projects restarting.

The downside is that a broad-based recovery of the overall economy is still to be seen. “As normalcy returns, the movement of goods and people is increasing. Therefore, we expect demand to pick up across regions. E-commerce and enhanced purchasing power in a somewhat strong rural economy will drive the growth further,” Sondhi added.

Ashok Leyland’s October sales reflect this pattern. Truck sales in October jumped 13 per cent y-o-y but the near decimation of bus sales (because of the closure of schools and public transport) saw total M&HCV sales drop 15 per cent that month. LCV sales, however, increased 11 per cent in the same month.

The picture could change as the lockdown eases. “We believe India will recover swifter than many other advanced economies in 2021 and beyond,” said Satyakam Arya, managing director and CEO, Daimler India Commercial Vehicle.

If the industry is optimistic, analysts tracking the sector are less so. Icra, for instance, expects volumes to shrink 25-28 per cent this fiscal, which would bring industry volumes down to its lowest levels in more than a decade. Its outlook for the sector remains “negative” on the back of continuing pre-pandemic challenges such as over-capacity, subdued freight availability and financing constraints, all of which have been compounded by the pandemic.

CARE Ratings said its GDP expectation of minus 8.1 to minus 8.2 per cent for FY21 indicates that a complete recovery in CVs, especially MHCVs, is unlikely this year. The agency expects the CV industry to see a 24-29 per cent drop in sales, and MHCVs would drop 40-45 per cent. Analysts at Motilal Oswal predicted that the MHCV would regain FY20 levels only in FY23E. If the mandatory scrapping of trucks above 15 years is announced under the impending scrappage policy, CV sales could rebound sooner, however.

Sondhi added that it is difficult to put a specific timeline to full recovery. “We have seen the demand gradually ramping up from Q2 onwards,” he said, pointing out that Ashok Leyland is back to 70-75 per cent of its pre-Covid production levels already.

Arya thinks the longer-term outlook is still positive despite these challenges. “One reason we’re so confident about this is India’s size.”