Poor demand for the heavy CV segment is likely to linger for a longer period as the trucking sector will be up against a formidable challenger — Indian Railways' dedicated freight corridors (DFCs) — in the years to come.
By Saurabh Kumar & Pritish Raj
Poor demand for the heavy commercial vehicle segment, which has witnessed subdued sales volumes since November 2018, is likely to linger for a longer period as the trucking sector will be up against a formidable challenger — Indian Railways’ dedicated freight corridors (DFCs) — in the years to come.
Once commissioned, the DFCs will offer freight rates that would be up to 45% cheaper compared with roads, and the time taken for delivery will almost be the same, further impacting the demand for heavy commercial vehicles, whose demand is subdued on account of rise in prices and the revised axle load norms.
Dedicated Freight Corridor Corporation of India (DFCCIL) — a special purpose vehicle of the railways which has been entrusted with the job to develop DFCs in the country — is developing two corridors at present. While the Eastern DFC will run from Ludhiana to Dankuni having a length of 1,856 km, the 1,504-km Western DFC will run between Dadri and Jawaharlal Nehru Port.
While parts of the Western DFC have already been commissioned, the entire stretch may be operational by end of FY 2022. The Eastern DFC may take longer.
Analysts at Nomura said the compounded annual growth rate of M&HCV sales over FY20-21 may only be 4% compared with 7% over the long-term average due to the DFCs. “If rail infrastructure were to improve in this region, (along WDFC route), we believe there could be a meaningful shift from road to rail,” they said in a report.
The Western DFC connects Delhi and Mumbai and crosses through commercially important Gujarat. Major ports in the state such as Mundra and Pipavav are investing in rail infrastructure to connect to the corridor.
CV makers believe DFC’s will drive improvement in turnaround and it will be managed well by manufacturers with focus on offering better value proposition and improvement in overall cost of operations. “Rail offers complete rakes and does not cater to piecemeal freight transportation whereas road transportation offers end-to-end solutions and safer handling due to less number of transfers. Road transport has better service quality and is more reliable. Rails are dependent on bulk cargo and we do not see this trend shifting in near future,” said Rajesh Kaul, vice-president & product line head, M&HCV, Tata Motors.
Heavy commercial vehicle sales tumbled since the second half of FY19 — there was an average fall of around annual of 7% since November 2018 — as the hike in axle load norms gave fleet operators more bandwidth to load goods, which saw new purchases getting postponed. Adding to the woes, the upcoming BS-VI norms from April 2020 will see a substantial hike in prices, which experts believe will hit new vehicle purchases for at least a year.
Although the industry expects pre-buying of BS-IV variants, analysts said if that doesn’t happen, there could be further downgrade of growth estimates. “There are risks emerging over pre-buying, as operator utilisation is currently low and freight rates are depressed given the weak demand. If pre-buying does not happen, there would be a further 10% risk to our FY20 volume estimates,” the report by Nomura said.
Some experts also believe that improvements in the road condition and reduction in state border checks will increase the life of the old vehicles and therefore the replacement cycle will increase, hitting demand for new CVs.
“I expect the medium/heavy (long haul) CV segment will remain under pressure more due to increase in average utilisation consequential to improvements in roads and reduction in state border checks and a macroeconomic slowdown,” said G Raghuram, director, Indian Institute of Management, Bengaluru.
Meanwhile, Nomura expects the share of railways in overall freight transport to be 30% by FY25 compared with 19% in FY19. The National Transport Development Policy Committee, in a report in 2014, had also estimated the share of railways in freight transport to go up to 39% by FY22.
Even the industry believes that the DFCs will be a game-changer and a lot of cargo will shift to the railways. “At present, security and reliability is low in railways compared with roads. With DFC that disadvantage is expected to go away and given that it will be cheaper, we envisage that some amount of freight will move to railways,” said Vijay Kumar, chief executive officer, Express Industry Council of India.
Kumar added that the key point is that while trains are faster even today, space availability, reliability and visibility of shipment enroute is low. “Since we move high-value shipments, once confidence is instilled the industry will start using railways more,” Kumar added.