All’s not quite right in the market for medium and heavy commercial vehicles (M&HCVs). Sales may have been growing at a healthy pace for the past few months – they were up a hefty 73% in December – but discounts are still on offer.
All’s not quite right in the market for medium and heavy commercial vehicles (M&HCVs). Sales may have been growing at a healthy pace for the past few months – they were up a hefty 73% in December – but discounts are still on offer. Volumes for all players for January are still not available, but early indications point to around a 13% growth. According to transport research body Indian Foundation of Transport Research and Training (IFTRT), discounts in January and February are not traditionally a done thing, and no such discounts had not been offered in the months, at least in the last two years. Discounts doled out this year at between 12-15% were similar to that seen in December. However, fleet operators say that discounts being offered can go up to as high as 20% if multiple trucks are bought.
Girish Wagh, head of the commercial vehicle business unit at Tata Motors, said discount has become a part of the industry and its is something that cannot be avoided. He, however, suggested that high discount is generally compensated for in per unit realisations by transporters moving to bigger trucks. Most industry insiders suggest that the biggest reason for heavy discounts is the intense competition between the two biggest players, Tata Motors and Ashok Leyland, who together control about 80% of the M&HCV market. Competition has also become fiercer with new entrants such as Man Trucks and Daimler looking for a foothold. Citi’s investment advisory team in a research report contends: “CV volume growth has been strong in India, reflecting demand recovery, a conducive regulatory climate and weak base. Given Tata Motors’ increased focus on its domestic business and overall high competitive intensity, pricing would be under pressure.”
Big discounts on commercial vehicles are likely to hurt realisations for truckmakers, said brokerage & research firm Motilal Oswal in a report. However, another major reason for heavy discounts is the low level of capacity utilisation in the industry, pegged at around 55-60%, according to analysts. “There is a significant increase in higher tonnage vehicles, which has resulted in sporadic supply chain issues,” said a Citi report. Vinod Sahay, CEO, Mahindra Trucks and Buses, said when it comes to capacity for trucks, the utilisation is a mere 40%. This, he feels, is the biggest reason for the rising discounts on trucks. A quick look at how the M&HCV sector has performed over the past five years reveals that while GDP has grown at a CAGR of 6.9%, sales volumes of trucks have grown at 4.3%, when they should have grown at a significantly faster rate than the GDP. One analyst said the capacity utilisation of commercial vehicles at Tata Motors is at about 55% in the fiscal, while for Ashok Leyland, it is at 70%. The optimum capacity utilisation, according to analysts, should be more than 70%.
However, Wagh said the company’s CV capacity utilisation is at full capacity at its Jamshedpur, Lucknow and Pune plants, and at 45-50% at the Pantnagar plant. He said the problem lies in some bottlenecks in production lines. One of the biggest reasons for the slump in commercial vehicle sales that followed in the financial years 2013 and 2014 was the slowdown in economic activity, according to Binaifer Jehani, director, Crisil Research. “This also resulted in a significant impact on freight utilisation of transporters, leading to financiers not being able to recover their outstandings. As a result, delinquencies rose for M&HCV loans in financial year 2014, which worsened M&HCV sales.”