M&HCV: 3 major players clock 54% sales growth

Positive outlook leads to an upgrade in volume estimates

November sales numbers for the top three medium and heavy commercial vehicles (M&HCV) players, Tata Motors, Ashok Leyland and Eicher Motors, exhibited a robust 54 per cent growth on a year-on-year basis, albeit on a low base. The growth is a continuation of the trend which started in August when sales growth turned positive for the first time in over two years. This trend could gather pace. Navin Matta of HDFC Securities says the positive macro outlook and an improvement in fleet owners' profitability should drive a strong demand uptick for CVs.

On the macro front, what gives comfort has been the 6.3 per cent increase in core infrastructure growth in October. Analysts at Kim Eng India believe increased core sector growth (38 per cent of Index of Industrial Production) coupled with rising Purchasing Managers' Index (PMI) and falling energy prices is positive for the M&HCV space. For November, PMI rose to 53.3, the highest in 21 months.

Analysts at Anand Rathi say the trend in core sector growth signals an improved Index of Industrial Production in the second half of the current financial year, which should push up GDP growth for the rest of the year. While the 5.3 per cent GDP growth in the September quarter was weak, analysts believe GDP growth would be 6 per cent in FY15. The M&HCV space is directly correlated to GDP growth and an improvement reflects in higher sales of the heavier vehicles.

While falling crude oil prices will mean savings on the operational front, falling interest rates, too, is a positive with most analysts expecting a rate cut in the first four months of 2015. A steep hike in rail haulage charges is also likely to bring additional business to the road transport segment (cheaper by about 15-20 per ceent) and thus improve the demand for M&HCV. The Railways hiked freight rates on container movement by 25-41 per cent recently.

Jinesh Gandhi of Motilal Oswal Securities, says freight rates have started inching upwards driven by gradual increase in fleet operator's utilisation. Over the next few months, he expects recovery in M&HCV volumes to gather pace on expectation of pick-up in economic activity and pent up demand due to sharply lower volumes of last two years. Given the positive sentiments, most analysts have upgraded the volume estimates for trucking majors. While volumes for Tata Motors is expected to improve 33 per cent between December and March from the year to date average monthly volumes of 9,500 units, Ashok Leyland's volumes are expected to improve 19 per cent over the YTD average of 5,500.