BS-VI implementation can lead to short-term headwinds for CV sales

India Ratings and Research (Ind-Ra) said on Wednesday that Bharat Stage VI (BS-VI) emission norms scheduled to be implemented from April 1 next year can create short-term headwinds for the commercial vehicle (CV) segment.

Considering the sharp year-on-year fall in their sales volumes since May, underwhelming pace of industrial activity and higher cost of ownership of a BS-VI CV, the implementation of BS-VI can add to the sector's woes.

Given the excess supply situation and muted demand-side fundamentals in the economy, Ind-Ra said the pre-buying of BS-IV CVs till the end of Q4 FY20 is unlikely to be meaningful as compared with the earlier occasions when new emission norms had been implemented.

For fleet owners, the ownership of BS-VI CV will be credit neutral as the benefits from fuel efficiency and maintenance will largely be offset by higher debt repayments.

The total system capacity grew at 6 per cent compound annual growth rate from FY13 to FY18. Besides, the revised axle load norms led to inorganic capacity expansion in the system.

Demand-side fundamentals, however, have remained fairly muted as evident from the decline in the index of industrial production and a decrease in aggregate volumes of manufacturing companies from Q1 FY19.

This has resulted in a demand-supply mismatch. Against this backdrop, a pick-up in CV sales during Q3 FY20 and Q4 FY20 due to pre-buying appears unlikely.

Demand for CVs will remain challenged in the near-term by slowing growth of industries and the economy in general as well as the impact of extended monsoon on agricultural produce and rural demand.

Assuming customers anticipate a revival in the economy and are offered incentives in the form of discounts, Ind-Ra said the sector may witness moderate levels of pre-buying of BS-IV CVs.

This, however, will lead to delays in the purchases of BS-VI CVs post April 1, 2020. Hence, the sales of new BS-VI CVs can be lacklustre in Q1 FY21 and Q2 FY21, unless backed by an actual improvement in economic prospects.

In an excess supply situation, where weak demand from the industry will not fully support the already built-in system-level supply, an expensive new BS-VI vehicle will be quite unviable for financers, according to Ind-Ra. An underutilised fleet with flat freight costs will put pressure on the debt repayment capability of fleet owners.

Consequently, the lenders will exhibit risk aversion with respect to extending credit to buyers of BS-VI vehicles by offering lower-than-usual loan-to-value and higher financing costs, especially to fleet owners whose operating cash flow will be inadequate to offset the debt repayments.

With respect to efficiency, a comparison of BS-VI CVs with BS-IV CVs shows that a BS-VI CV may report better performance in terms of mileage and maintenance cost due to its onboard diagnostic system.

However, the higher debt repayments required for BS-VI CVs due to its relatively higher cost will offset the benefits of lower maintenance or improved mileage, leading to stable debt service coverage ratios.

Overall, all other factors remaining the same, Ind-Ra expect buying of BS-VI vehicles to be credit neutral for fleet operators.

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