Fleet modernisation proposals to boost CV sales, improve fuel efficiency

8% of overall fleet would need to be replaced if commercial vehicles above 15 yrs are scrapped

If proposals on the fleet modernisation programme for commercial vehicles (CV) are accepted, it could lead to a significant uptick in demand for this segment. The success of the programme, however, will depend on the age limit of the vehicles, which are expected to be phased out, and the extent of incentives to be offered by the government.

Subrata Ray, senior group vice-president (corporate ratings), ICRA, estimated that if vehicles older than 15 years are phased out, it could lead to a sizeable demand for new commercial vehicles, as the population of vehicles over 15 years is estimated to be around 300,000-400,000 about eight per cent of the existing fleet. The government, in its last draft note on voluntary vehicle modernisation programme (VVMP), indicated that vehicles sold prior to March 2005 would be eligible for scrapping. However, the programme was envisaged during the pre-GST period and included excise duty breaks, which would have resulted in 10-12 per cent fall in price of the truck at the ex-showroom level.

In addition to reducing the cost of the vehicle, the programme is aimed at improving fuel efficiency, reducing pollution as well lower maintenance and breakdown costs. If the benefits of the VVMP remain the same, according to CRISIL Research, 640,000 vehicles will come up for scrapping during the three-year course of implementation of the scheme.

Out of the 640,000 vehicles, 200,000 would have anyways been scrapped. Hence, incremental vehicles, which will come for scrapping due to the scheme, will be 440,000. Eighty five per cent of the vehicles, which will be scrapped under this scheme, will be MHCVs, said Binaifer F Jehani, director, CRISIL Research. The incentives are expected to help the sector, which is slated to post a growth of 7-10 per cent in FY18, led by light commercial vehicles. Growth is on the back of a strong replacement cycle, improved financing environment and demand from e-commerce.

The heavier commercial vehicles too are expected to outperform overall industry, led by strict overloading norms, demand from construction and mining segment (tippers) as well as tractor trailers.

A higher proportion of heavy trucks will improve the product mix and rub off positively on the margins of CV makers.

The near term will see headwinds as discount levels continue to be high and companies are focused on improving their market share.