Commercial vehicle space sees feeble recovery

In August, medium and heavy commercial vehicle (M&HCV) sales grew 9.6 per cent, igniting hopes of a revival in the commercial vehicle (CV) segment. As CV sales are considered a key indicator of economic activity, trends in the segment are keenly watched for signs of an economic revival. But can the recent rise in sales be construed as a sign that the segment, which has contracted through the past two years, is moving towards a slow and gradual recovery?

Past data suggest M&HCVs act as a leading indicator of the segment. Sandeep Prem, assistant general manager at CARE Ratings, says, "Growth is first observed in this (M&HCV) segment, followed by the light commercial vehicle (LCV) segment."

Data for this financial year show while sales in both the LCV and M&HCV fell for the entire April-July period, for August alone, the M&HCV segment grew 9.6 per cent and the pace of contraction in the LCV segment eased somewhat. This uptick could be seen as a sign the segment might be bottoming out.

Sudhir Khanna, executive vice-president, Kotak Mahindra Bank, says, "Normally, the medium commercial vehicles (MCV) segment shows the first sign of growth, while we are now witnessing sales growth in the super heavy segment. Logically, this should be followed by smaller-tonnage vehicles, perhaps with a lag of six-nine months."

Commercial vehicle operators expect demand to pick up during the festive season, indicating a turnaround in the segment is likely towards the end of this financial year. Prem says, "A recovery in the medium and heavy commercial vehicle space is expected in the last quarter of this financial year, followed by growth in the LCV segment in the first quarter of FY16. Improvements in infrastructure spending and manufacturing activity towards the end of the financial year will translate into an improvement in the commercial vehicle segment. The M&HCV segment will see recovery first, followed by the LCV segment."

However, concerns remain. As commercial vehicle operators tend to rely on credit to purchase vehicles, the slowdown in credit growth could impede recovery. Also, current fleet utilisation rates continue to remain low. Operators feel unless utilisation rises, there is no point in expanding capacity, indicating if the recent upsurge in economic activity isn't sustained, a recovery might not be close.

On capacity utilisation, Khanna says, "There is an increase of about 20 per cent in capacity utilisation due to increase in the availability of loads in segments such as coal, cement, automobiles and grain movement. However, we are still a little far away from full capacity utilisation.

But moderation in growth in coming quarters could impact capacity utilisation. Though growth in gross domestic product stood at 5.7 per cent for the June quarter, analysts expect it to moderate in the coming quarters, as agricultural growth is expected to slow. Also, the recent Index of Industrial Production numbers indicate sluggish growth in this segment. Data on bank credit growth shows credit offtake to industry continues to remain weak.

For the April-July period, bank credit to industry fell 0.6 per cent compared to the year-ago period. Within industry, while credit growth to micro, small and medium enterprises was marginally positive, that to large industries fell 0.9 per cent, indicating the road to a full-fledged recovery might be long.

According to Citi Research, the commercial vehicle segment is likely to end the year with contraction of 4.5 per cent, probably because the LCV category, which accounts for two-thirds of the segment, will see growth with a lag, compared to the M&HCV segment. It is expected the entire segment won't record growth before next financial year.