Commercial vehicle sales to see a decline in FY18, says India Ratings

Agency believes demonetisation drive has impacted second-hand CV market

While the sale of commercial vehicles started on a positive note, with a growth of about one per cent in January, it is expected to close financial year 2017-18 with a decline, due to a slowdown in the replacement demand and weak industrial activity, among the other factors.

The medium and heavy commercial vehicle (MHCV) segment will post a steep decline in volumes in FY18, due to slowing replacement demand, weak industrial activity, rising diesel prices and overcapacity, says India Ratings and Research (India Ratings).

Commercial vehicle (CV) majors Ashok Leyland and Mahindra did not respond to an email asking for a comment.

The projection comes despite the Union Budget's focus on the rural sector. Weak sales volume trends as well as macro-economic trends observed in FY17 for the MHCV segment could lead to a fall in volumes in FY18. The decline in MHCV volumes in the April to December 2017 period was around two per cent year-on-year, while sales rose in January by one per cent due to pre-buy demand ahead of BS-IV, which will increase the cost by around 9-10 per cent.

Going ahead, transporters will primarily base their purchase decisions on the demand-supply position in the road transportation space in their respective regions and the extent to which it will be possible to deploy the trucks.

The agency believes that replacement demand, a key driver of MHCV sales in FY16 and FY15, has largely depleted. Given the continued uncertainty on the industrial front, the agency expects freight rates to remain flat. Any further rise in diesel prices might squeeze margins of transporters and fleet operators.

The above 25 tonnes capacity-segment of MHCVs was the driver of volumes in FY16 but has declined very sharply in FY17, suggesting overcapacity in the road transportation industry.

India Ratings believes that the demonetisation drive has impacted the second-hand CV market, where a significant proportion of transactions take place in cash, impeding the efforts of fleet operators to sell their old vehicles to raise funds for part-funding of their new CV purchases. In addition, the level of industrial activity as reflected in the Index of Industrial Production remains inconsistent, declining from March 2016.

The implementation of goods and services tax in FY18 would reduce transportation time significantly as goods will be transported freely from one state to another, bypassing various check points and octroi posts. This would create additional spare capacity in the road transportation sector, creating a drag on new MHCV sales.