Commercial vehicle (CV) volumes are expected to decline 25 to 28 percent this fiscal year amid multiple headwinds combined with the impact of the pandemic, and the outlook for the sector remains "negative" due to ongoing challenges, rating agency Icra said Wednesday.
In the previous fiscal year, the domestic Commercial vehicle production volume stood at 7,17,688 units compared to an all-time high of 10,07,311 cars in 2018-2019.
Icra said the outlook for the commercial vehicle sector remains "negative'' in the context of ongoing challenges such as excess capacity, decreased cargo availability, and financing constraints, among others, all of which have been exacerbated by the pandemic.
The rating agency said it expects volumes to contract in fiscal 2021 by 25-28 percent, leading to industry volumes falling to their lowest levels in more than a decade. ICRA conducted an extensive survey of 26 traders from 11 countries in October to assess trends at the ground level and understand the current challenges facing the sector.
"The local Commercial vehicle sector was already in the midst of several headwinds in fiscal 2020 and experienced a sharp contraction of 29 percent in volume," said Shamsher Dewan, Vice President of Icra.
“The industry expected the downward cycle to extend to current public finances as well, as the increase in vehicle prices after the transition to the new emissions standards (BS-VI) would have added to a large number of current challenges. However, the extent of the slowdown has been worse than expected, due to the challenges created by the epidemic.
Current challenges such as overcapacity in the road transport system decreased cargo availability due to a weak macroeconomic environment, financial constraints, and pressure on cash flows for fleet operators have been seen exacerbated by the emergence of the pandemic and the closures imposed to contain it. , He said.
Consequently, fleet operators pushed new car purchases into a state of decline, as evidenced by the 85 percent and 55 percent contraction in total CV retail volumes in the first and second quarters of fiscal 2021 respectively, according to Dewan.
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85 percent of merchants indicated during the survey that sales volumes continued to decline through September 2020, and despite the sequential improvement, the current demand environment remains generally calm, due to challenges, Icra said.
Noting that financing remains a major obstacle to sales, he said that one of the main challenges highlighted is that pressure in the fleet operator sector has made financial institutions more cautious when lending to the CV segment.
However, on a positive note, the survey also indicated that 50 percent of traders reported stock levels of less than three weeks, while 42 percent reported levels between 3-5 weeks.
Original equipment manufacturers (OEMs) had to provide limited support in the form of financing or incentives to dealers during this period as inventory levels were very low.
Also, they have been supportive of not pushing excessive inventory to dealerships as the demand environment remains weak, Icra said.
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Dealers have also become cautious about the rebate, with more than half of dealers reporting discount levels below 10 percent. This is well below reported redemptions last year as dealers struggled to liquidate potentially obsolete BS-IV shares with the switch to BS-VI standards effective April 1, 2020.
"ICRA expects a significant double-digit contraction with greater impact on M & HCV (medium and heavy commercial vehicles) (trucks) and the bus sector. LCVs (light commercial vehicles) (trucks) are expected to perform relatively better, backed by a warm rural feeling and increased requirements to get around the last mile".
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