Commercial Vehicles: In reverse gear

It doesn’t come as a surprise that commercial vehicle makers, Tata Motors and Ashok Leyland have decided to cut back production. Ashok Leyland is opting for a three day week till December while Tata Motors plans to stop production of CVs in Pune and Lucknow for six days this month.

Demand for CVs continues to remain weak : between April and October this year, total domestic commercial vehicle (CV) sales have fallen by 3 per cent y-o-y (source: SIAM) and the next six months could see the situation worsening. Last year, CV sales in the domestic market had increased by 4 per cent y-o-y compared with a robust 33 per cent in FY06-07. Since credit remains scarce and costly, analysts are not clear when the trend could reverse. Moreover, with economic activity slowing down, the demand for trucks too could slacken, they point out.

If October numbers are anything to go by, the CV cycle is unlikely to turn in a hurry. Volumes across all categories—heavy, medium and light—have dropped in October 2008, compared with the same month last year. While heavy and medium vehicles were already seeing fewer takers, light vehicles were in good demand even till September. In fact, between April and September, the light segment grew 15 per cent and was boosting the numbers.

However, in October Tata Motors sold fewer light vehicles—sales came off by 10 per cent. Ashok Leyland is worse off--- commercial vehicles sales fell 45 per cent y-o-y in October 2008 and since the start of this fiscal they have fallen by 11 per cent, on a low base.

The Tata Motors management had indicated after the recent results announcement that it may consider cutting back its planned capital expenditure for the year. That may be a good idea since it would be imperative to control costs at a time when demand doesn’t show signs of picking up.

Ashok Leyland has planned to spend Rs 2,500 crore on various initiatives which may prove to be difficult given that money remains costly and cash flows are likely to be weak.