Ind-Ra: Aggressive Commercial Vehicle Sales Can Stall Impending Improvement in Asset Quality

A turnaround in the commercial vehicle (CV) sector will be slow, India Ratings & Research (Ind-Ra) says. A recovery in terms of fleet utilisation and improved margins for vehicle operators similar to FY09 level looks unlikely before 1QFY16.

The ratio of fleet capacity growth (as measured by medium and heavy commercial vehicles sales) to industrial production growth climbed to 1.8x in FY14 from 1.3x in FY09, according to agency's analysis. This change was driven by a slowdown in the industrial production and insufficient contraction in CV sales. This has resulted in fleet under-utilisation and affected CV operators' ability to negotiate higher freight rates in spite of rising fuel costs, impacting both revenue and margin of operators, said Arvind Rana, Associate Director, Structured Finance at Ind-Ra.

The demand supply mismatch would not return to the FY09 level before 1QFY16 even if the Index of Industrial Production grows 6% and medium and heavy commercial vehicles sales remain flat. The existing surplus capacity needs to be absorbed before the sector can witness any significant CV sales without hurting asset quality, said Jatin Nanaware, Director, Structured Finance at Ind-Ra. Higher CV sales growth on the expectation of an improving economic scenario could slow down the recovery, adds Nanaware.

However, the agency believes that its rated portfolio's performance is unlikely to worsen. This is considering the portfolio has started showing signs of stability - with early stage arrears (30+ days past due (dpd) delinquency) coming off their peak. The agency expects that late stage arrears (90+dpd delinquency) would also stabilise with a lag.

The late stage arrears are, however, unlikely to drop quickly as recoveries on overdue loans for recent vintages (FY13-FY14) have dropped to half of the levels seen for FY07-FY10 vintages. This highlights the fact that while incremental defaults have slowed down, if the industrial production does not improve, a significant drop in defaults (on account of improved collection efficiency) would be a long haul.

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