Commercial vehicles: Growing in tandem with the economy

Updated: Oct 30 2005, 05:30am hrs
The financial year 2006 can turn out to be a landmark for the commercial vehicle (CV) segment. For September 2005, the industry recorded a sales growth of 81% as compared to April 2005, registering a sale of 42,816 vehicles.

Bolstered by the growth in industrial sector, road and infrastructure development, availability of finance, stable interest rates, and introduction of new models, the sector has grown by 22.4% in the year 2004-05. Commercial and passenger vehicles sales have gone up by 25.52% and 19% respectively during the same period.

Today, every sector and industry has a reason to grow in the Indian economy. India has witnessed activity in terms of industrial production. The sector has grown by 10.3% in the first quarter of 2005-06, on the other hand, manufacturing has witnessed a growth of 11.2%, in the same period.

However, the government's emphasis on development of infrastructure has had an impact on the growth of industries. The transportation system of a country and connectivity of roads and ports, play an important role in pepping the growth of any industry.

Indian companies have come a long way in terms of marketing the final product, procuring the raw material, trading of goods has moved from being regional to national and now it is global.

Post-liberalisation, phasing out of quantitative restrictions, restructuring duties and levies at state and national level has changed the way goods are being transported. Subsequently, government policies with respect to foreign, technical and financial collaboration lead to a sudden spurt in technical collaboration in the automotive industry. Indian companies like Eicher Motor acquired shares of US-based Design Intent Engineering Inc to synergise with the company's commercial vehicle business.

Commercial vehicle industry is smiling along with growing industrial activity in the country. The sales turnover of some of the auto majors such as Tata Motor, Ashok Leyland and Eicher Motors has gone up by 32.52%, 23.47% and 45.37% at Rs 17088.59 crore, Rs 4248.13 crore and Rs 1982.51 crore respectively.

On the other hand, net profit of the same companies has gone up 52.64%, 40.20% and 75% at Rs 1236.95 crore, Rs 271.41 crore and Rs 58.85 crore, respectively.

The BSE Auto Index has risen by almost 42% against Sensex's 35.49% gain over one year. Driven by good financial and better outlook for vehicle sales, share prices of companies like Tata Motor and Ashok leyland has gone up by 26.12% and 48.28%.

Commercial vehicles

The industry accounts for 4% of the total automotive market. The size of CV industry in India is 3,50,000 vehicles per year. It represents about 1.5% of the total world industry size, whereas China accounts for 13% of the world's size.

Indian CV industry has gained its significant presence in marketing these vehicles in the international market, especially in neighboring countries like Sri Lanka and Bangladesh. On the other hand, the exports of CVs account for 8.5% of total sales, in the year 2004-05 the exports have grown by 71.80%, in last five years same has more than doubled from 13,770 vehicles in 2000-01 to 29,949 vehicles in year 2005.

The CV sector can be broadly classified as light commercial vehicles (LCV) and Medium and Heavy Commercial vehicles (M&HCV) based on the gross vehicle weight. LCVs and M/HCVs have grown by 23% and 21.43% at 1,61,395 and 98,719 respectively. Tata Motors, which is the leader in the CV market accounts for almost 59.7% market share. The sales of Tata Motors have grown by almost 65% and 50.7% respectively in both the segments.

Except in some industries, trucks are traditionally used in almost all industries to transport goods. Whether it is agriculture produce or industrial output of cement, steel, petroleum products and consumer goods, trucks plays an important role in realising the demand from manufacturer as well as the end user. Trucks are also considered preferred choice at ports for the movements of containers. Driven by the growth in the industrial output and import export in the country the overall availability of fright has been exceptionally good in last couple of years.

The Index of Industrial Production (IIP) have gone up by 11.7% in June 2005, in the same period the mining and quarrying, manufacturing and construction have increased by 4.5%, 11%, and 8% respectively. Looking at the growing demand in the domestic and international market companies across the industries are ramping up capacities. When once the utilisation of these new capacities begin, it will create an additional demand for transport.

Infrastructure

The implementation of infrastructure projects will have a positive impact on the demand for CVs & UVs, as they are extensively used in transportation of material and requirements of the projects. Therefore, the large projects coming in to develop the ports and roads like national highway projects (aimed at developing 14,000 km of national highway, under National Highway Development Project (NHDP) phase I and phase II) are expected to trigger the demand. Going ahead, the launch of NHDP III, which is expected to develop selected high-density highways will augur well for the industry.

Apart from the above efforts, the government has launched various projects to augment road connectivity to de-congesting the ports. The projects have begun at around ten ports, some of the projects are at final stage of completion, while the others are expected to complete in 2006 and 2007. Through the development of these special four-lane highways, connectivity of ports will improve significantly and reduce travel time, as a result more goods will flow through trucks and not railways.

Crude reality

Internationally, in the last one-year oil prices have gone up sharply and touched to $70 a barrel. It is currently hovering at $62 a barrel. However in India by and large oil prices are still controlled by the government. In India bulk of CVs at around 80% is engaged in transportation of the goods, the profitability and opertaing margins of these companies depends on prevailing freight rates in the market. Freight rates in the country to a large extent, follows the trend in oil prices, the rise in oil prices increases the cost of road transportation and in turn, becomes costlier than other modes of transportation, which again impacts on demand for CVs.

Says OP Harshwal CEO, Patel Roadways Ltd: "The rise in oil prices have hammered the profitability of transport companies, cost of diesel to total cost has gone up drastically and forms around 70% of the total cost presently. Earlier companies were not able to pass additional cost to consumer, given the stiff competition from the unorganised sector. However the trend is changing and companies are ready to bill high."

Apart from the oil prices, the industry is open to competition from the global players. Many automobile manufacturers are entering India with a range of products. The global players would also want to take advantage of low cost.

The industry analysts, however, feel that in the long run companies with higher networth and strong product innovation will be able to grow.