If the sale of commercial vehicles is an indicator of the health of the economy of a country, then the sales performance of light commercial vehicles (LCVs) is far less depressing than the economic downturn. Sales in this segment last month dropped by only 3.7% year-on-year in the domestic market in contrast to 51.4% drop in medium and heavy commercial vehicles (M&HCV).
For example, in February this year Tata Motors, the largest player in the commercial vehicle segment, saw an overall dip of 25% year-on-year sales. The company?s M&HCV sales dropped 48%, but the showstopper was the LCV segment. The LCV sales were the highest in the last four months and even 2% higher than February last year. Similarly, Ashok Leyland sold more LCVs in February this year compared with the same month last year, but their medium duty vehicle (goods) sales dropped by 74% in the same period.
The reasons vary. For some, the fall in sales of light commercial vehicles is not as steep as M&HCVs because most LCVs are used by door-to-door logistics firms for retail cargo and feed to the growing hub and spoke model. In fact, for quite some time, there has been a shift towards LCVs. Medium duty vehicles, which used to dominate the CV market a few years ago, are being replaced by high tonnage multi-axled vehicles at the upper end and LCVs at the lower end. The LCV segment is driven not just by infrastructure and manufacturing sectors, but also by retail and consumer goods. Moreover, the LCV market has been able to keep its demand as Delhi and few other states are making it mandatory to register Euro III complaint norms.
Others attribute it to the stimulus packages, which sought to boost the sales of commercial vehicles on month-on-month basis. It?s early days yet for the impact to sink in.
Rakesh Kalra, managing director, Mahindra Navistar Automotive Ltd, feels that the monetary measures like injecting liquidity at lower interest rates and fiscal measures like dropping excise duties have lifted the sentiments in the fourth quarter of FY09 after a sluggish third quarter sales. ?We don?t expect a very buoyant first half in FY10. However, the situation thereafter should start improving after the new government stabilises. At the best, FY10 is likely to be flat,? says Kalra. He adds, ?It will augur well for us in the CV segment if the new government holds the excise duties at current levels and sustains the flow of capital into the infrastructure projects.?
Vaishali Jajoo, an automobile and transportation analyst at Angel Broking, says the lull in commercial vehicle sales will continue for six months. ?However, sales are expected to pick up on a sequential basis or gradually every month.?
The slight spurt in the sales of commercial vehicles during January and February took place after the government announced stimulus packages. Another sales booster was the government?s decision to grant accelerated depreciation of up to 50% from the existing 33% to new vehicles purchased from January 1, 2009 up to March 31, 2009. This measure brought down the tax liability of vehicle owners and big operators added to their existing fleets.
It?s nowhere near the enabling conditions that fuelled the auto boom in the first place. Earlier, easy credit offered by private sector banks pushed sales of commercial vehicles from 2005 onwards. But now with rising defaults, banks have become overcautious in lending and have hiked up the interest rate from as low as 6% to 14% now. Moreover, the margin money for buying trucks in 1996-97 was 35% of the total cost. It came down to a rock bottom 5% and now it has again gone up to around 25% and is still rising. Earlier, banks used to finance new borrowers only if they could get a guarantor, who was himself a fleet owner. Subsequently, it was eased to just a single owner and first time users were encouraged vigorously. With defaults rising, banks are now reverting to the earlier guarantor clause.
?So anybody and everybody was buying trucks and putting them into business as the rentals were healthy. But with the economic slowdown and construction activities coming to a halt, most of the new fleet is unused now,? says S P Singh, fellow, Indian Foundation of Transport Research and Training. Reports suggest that about 30,000 trucks, mostly less than two-year-old, have been repossessed by banks in the last few months and are available for sale with auto finance firms.
To tide over the current situation, companies are postponing their capex plans. Based on industry growth till 2007-08, players had planned for capacity expansion and new projects. In the wake of the falling sales, joint ventures and new plant capacity are being reviewed and deferred. Says Yezdi Nagporewalla, executive director and head of industrial markets, KPMG, ?The installed capacity is high, considering the recent drop in demand.
Hence, plans for additional capacity are being reconsidered and corrections are being looked at to adjust immediate production to market demand. This would also address the high inventory issue.? A case in point is Ashok Leyland, which has announced a reduction of capex plans for three years from Rs 3,300 crore to Rs 2,000 crore.
Auto dealers say that they are sitting on four to six weeks of inventory as against two weeks inventory normally held in the last quarter of this fiscal. Apart from production overcapacity, truck sales have been sluggish because of overcapacity in the national fleet in the last one year and continuous decline in the cargo offering in the last 10 months. Truck rentals too have declining by about 25% in the last one year.
Though the outlook for trucks still looks gloomy, bus sales are picking up. They account for 15% of CV sales. Under the Centre?s Jawaharlal Nehru Urban Renewal Mission, it is estimated that around 15,000 new buses are likely to be ordered by various state transport corporations by June -end.
Of course, the overall sales of commercial vehicles would finally depend upon on how the country?s economy shapes up in the next few months.