The second wave of Covid-19 will limit growth in the domestic commercial vehicle (CV) sales volume to 23-28% this fiscal as against the expected 32-37%, rating agency Crisil has said.
While a sharp recovery from the lows was on the cards this fiscal, it will be constrained by a weak first quarter because of the second wave of the pandemic, the Crisil research note said. In April, freight rates fell 20 per cent on-month even as diesel prices remained elevated, hurting fleet operators.
With lockdowns becoming widespread in May, freight movement, and consequently the profitability of fleet operators, will remain under pressure, weighing on demand at least in the first quarter, it said. As lockdowns ease from the second quarter, freight demand and rates could normalise, aiding demand for CVs.
Pointing out that the volume growth had touched decadal low last fiscal, Crisil said the credit metrics of CV makers were expected to improve as margins expand on better capacity utilisation and product mix.
The CV market saw two consecutive fiscals of steep volume decline — 29% and 21% in 2020 and 2021, respectively — following multiple headwinds such as revised axle norms, BS-VI transition, and the pandemic.
Hetal Gandhi, director, Crisil Research, said: “MHCV volume, which was hurt more in the past two fiscals, should see a strong 35-40% growth this fiscal, driven by the government’s infrastructure thrust and revival in economic activity. LCVs could grow 15-20% given continued last-mile demand from e-commerce, consumer staples and the replacement market. Demand for buses — the segment hit the hardest because of schools shutting and lack of demand from state transport undertakings and corporates — should grow 67-72%, but will remain at multi-year lows. Overall CV volume would still be 30% below fiscal 2019 level.”
Original equipment makers (OEMs) are unlikely to get a fillip from the wholesale push, because inventories at dealers were at fairly elevated levels of 35-40 days as of March-end, against normal levels of 25-30 days. Inventories had risen sharply in the second half after near-zero inventory at the beginning of last fiscal due to the BS-VI transition.
Crisil said, however, one key positive this year would be faster revenue growth versus volumes. Better product mix due to higher sales of costlier MHCVs compared with LCVs would provide a fillip to average realisations. Raw material cost inflation, particularly in the form of steel prices, is expected to be largely passed on to consumers, similar to last fiscal, which saw 10-15% price increases due to both BS-VI and commodity inflation.
Naveen Vaidyanathan, associate director, Crisil Ratings, said: “Higher revenue, coupled with improved capacity utilisation up from 38% to 45%, and control on fixed costs should help CV makers improve operating margin this year to 7%. Last year, players had eked out operating margin of 4.4% despite decadal-low volume due to significant operational improvements and reduction of fixed costs. But notably, margins this year would still be lower than the average 9.5% achieved over fiscal 2016 to 2019.”
With improved profitability, capex –— cut sharply last year — should more than double this year to normal levels. Nevertheless, higher profitability would drive free cash flow generation and help lower debt. This would support an improvement in credit metrics — interest cover should improve to 3.6x from a low of 1.5x last fiscal, it said.
The forecast is predicated on recovery in demand from the second quarter with easing lockdowns and pace of vaccinations picking up. A third wave of Covid-19 could further dampen sentiment, Crisil said.
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