Fleet replacement perks up demand for M&HCVs

The segment, represented largely by Tata Motors, Ashok Leyland and Volvo Eicher, has grown over 24% in the April-May period

The medium and heavy commercial vehicle (M&HCV) manufacturers are busy as the segment is witnessing high double-digit growth, in contrast to the passenger vehicle segment which is struggling to maintain double-digit growth, and flat two-wheeler sales.

The segment, represented largely by Tata Motors, Ashok Leyland and Volvo Eicher, has grown over 24 per cent in the April-May period of the current financial year, driven mainly by replacement and fleet addition demand. The growth had kicked in from September last year and the segment grew by 16 per cent last year. Experts say the segment is projected to see an even higher growth this year.

Profitability of fleet operators have improved due to a decline in fuel prices during the last two quarters of FY15. “The improvement is driven by clearance to road projects, opening up of the mining sector, cargo trucks such as petrochemical vehicles, tankers, liquid petroleum gas products, resulted in improvement in the utilisation of trucks. Utilisation has gradually improved from about 50-60 per cent from about five to six months ago, to about 75-80 per cent, as per operators. With operators having postponed their fleet replacement, in the last two years, they are now slowly coming back”, said a Tata Motors spokesperson.

HOW THE SEGMENT IS FARING

• The segment has grown over 24% in the April-May period of the current financial year
• The growth is driven mainly by replacement and fleet addition demand
• Profitability of fleet operators have improved because of a decline in fuel prices during the past two quarters of FY15
• The segment has now grown for the 10th month in a row but in absolute number it is still down from the peak

Fleet operators cannot postpone replacement beyond a certain period as an older vehicle breaks down more frequently, leading to loss of business, and demands more maintenance. “Last year, we spent Rs 25-30 crore on fleet replacement. This year, we plan to invest Rs 75 crore on fleet replacements and addition. We expect to grow our business by 15 per cent this year as the economy is picking up,” said Vineet Agarwal, managing director, TCI, which owns a fleet of 1,200 trucks and clocks an annual revenue of Rs 2,200 crore.

Anticipating a recovery, bankers are opening up financing to the commercial vehicle sector, leading to a pick up in disbursement to large fleet buyers. However, this is not the case for small commercial vehicle buyers, mostly one-two vehicle owners. Here banks continue to be cautious in lending. The light commercial vehicle segment, therefore, saw a decline of over five per cent in April-May.

While the current growth is coming on a low base, the industry is upbeat that growth momentum will continue. “Heavy trucks are mostly operated by large fleet owners who anticipate the slump as well as a revival better. In anticipation, they either stop or start buying vehicles,” said Vinod Aggarwal, chief executive officer of Volvo Eicher Commercial Vehicles. Aggarwal said a good growth is happening all over the country even as construction segment is still down. “Once infra projects take off, more growth will come.”

The segment has now grown for the tenth month in a row but in absolute number it is still down from the peak. According to data with the Society of Indian Automobile Manufacturers, over 40,000 medium and heavy commercial vehicles were sold in March 2011, the peak month. In May, only 20,615 vehicles were sold. Aggarwal said the industry is seeing an improvement in capacity utilisation and volumes will go back to its peak in a year. Around one-fifth of the M&HCVs sold are passenger carriers (buses) and Aggarwal said a demand up tick in seen from state transport undertakings.

The M&HCV industry is growing better than the passenger vehicle segment, which grew at 10 per cent in April-May. Unlike the passenger vehicle segment, where only three to four manufacturers are growing, in the M&HCV segment, every single player is growing at a healthy rate.

“The seriousness of the government to improve infrastructure is one of the biggest driving forces, as it will result in increase in the movement of goods across states. This will also trigger of movement of cement, steel, sand, aluminium and coal, for infrastructure, in turn driving up growth in the commercial vehicles sector,” the Tata Motors spokesperson said.

Company	Medium & Heavy commercial Vehicles sold in April-May 2014	Volumes in April-May 2015	% change
Tata Motors	17,538	20,967	19.55
Ashok Leyland	7,954	11,664	46.64
Volvo Eicher Commercial Vehicles	3,864	4,557	18