The slowdown in the commercial vehicle (CV) industry is imminent in the short term as headwinds are gaining momentum, a new study by Icra has said.
After registering a strong 30% growth over the past two fiscals, the growth in the CV industry has somewhat slowed down during the current year. During April-November 2011, the domestic CV industry posted a growth of 21.0% y-o-y riding on a strong 31.4% growth in light commercial vehicles (LCVs) and a fairly muted 9.5% in medium and heavy commercial vehicles (M&HCVs).
Steadily rising interest rates, contracting industrial output and a considerable increase in vehicle prices coupled with high a base effect of previous years are the main factors impacting growth. The operating environment for fleet operators has been deteriorating over the past six months. All factors that influence the viability appear to be weighing against the profitability and cash flows of operators, said a report by Icra.
The sharp rise in overall cost of ownership combined with considerable rise in operating costs and an almost stagnant freight rates in a confluence are displaying signs of pressures on fleet operators. Several operators have postponed their expansion plans in view of rising interest rates and expectation of slowing industrial growth. Capacity utilisation is gradually declining and freight rates continue to remain stagnant despite rise in operating expenditure for operators.
On the financing front, some of the financiers have also started tightening lending norms in addition to the rise in interest rates. Overall, the near term risks against M&HCV demand has increased significantly, though structurally, the demand over a longer period remains intact, subject to normalisation of economic activity over the next two to three quarters, the report said.
Given the current environment where the growth in industrial activity is at a two year low and the operating environment for fleet operators is gradually weakening, it is expected the industry to defer capacity addition. As a result, the outlook for the near-term appears to be subdued, resulting in a slowdown in new vehicle sales.
Among segments, M&HCVs which tend to be more influenced by the macro-economic indicators is likely to register a weaker performance over the near term as LCV segment.
The proliferation of the hub-and-spoke model, improving last mile connectivity and the strong demand from the rural segment is likely to drive demand in the LCV segment over the medium term. While the M&HCV industry is expected to grow 3-4% in FY12, the LCV is expected to grow 17-18% in FY12. The long-term growth outlook for M&HCV maintained with a Cagr of 9.5-11.5% and for LCV with Cagr of 11-13% over the next five years.