Is the CV industry poised for a recovery? - Views on News from Equitymaster

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Is the CV industry poised for a recovery?

Jun 28, 2013

The commercial vehicles (CV) industry has not had anything to boast about in FY13. In fact, as far as the entire Indian auto industry is concerned, this segment was one of the worst performers of the lot. Indeed, nearly all months of the fiscal saw a decline in volumes; the result being that for the full year volumes were down 2%. In this, the medium & heavy commercial (MHCV) segment reported a 23% YoY drop in volumes, while LCVs did much better to grow by 14% YoY.

Factors impacting the CV industry

Slowdown in GDP: Compared to 2 wheelers and passenger vehicles, CVs are more cyclical and there is more of a close linkage with GDP growth. Thus, in a year where GDP growth slowed to the lowest level in a decade, the CV industry naturally bore the brunt. As industrial and agricultural activity remained sluggish, there was not much cargo availability. This then dampened the demand for new vehicles by fleet operators.

Overcapacity: The CV industry had grown at an impressive rate of 38.7% and 27% in FY10 and FY11 respectively. In FY12 too, although the pace of growth slowed, it was still decent at 18% YoY. Taking advantage of this buoyancy, most companies went in for expanding capacities. But in the subsequent years when the slowdown became more pronounced, companies were left with the hurdle of clearing this inventory. This too then had an impact on volumes. The steep discounts which especially became a prominent feature in the fourth quarter of FY13 also did not do much in terms of bolstering volumes.

Squeeze on fleet operators: Fleet operators also felt the heat. The slowdown in economic growth was mirrored in the freight rates as well which largely remained subdued as there was not much cargo to be ferried. On the other hand, operating costs continued to remain on the higher side. A squeeze of this kind meant that fleet operators were not keen on going in for vehicle purchases and this impacted volumes.

LCVs saved the day: Light commercial vehicles (LCVs) posted decent growth for the fiscal in a challenging macro environment. This provided some sort of a breather for the overall CV industry. The demand for LCVs was largely driven by non-urban markets. This has been on account of an improving road network which is enabling better connectivity to tier III, tier IV cities. As published in a report by ICRA, the demand for smaller vehicles is gaining preference on the back of stringent restrictions on heavy duty trucks and expanding city limits. Thus, all in all, the growth in LCVs is expected to better that of MHCVs in the medium term.

How have the major players fared?

Tata Motors: Tata Motors cornered a share of 59.5% of the CV market in FY13. Reflecting the trends in the industry, the company was not spared either as overall CV volumes grew by a mere 1% YoY during the year. This was largely on account of a substantial drop in MHCV volumes, while those of LCVs posted a decent growth.

Ashok Leyland: Ashok Leyland also faced heavy weather in the CV industry as volumes of MHCVs declined. Besides tepid demand which took its toll on volumes, the company also bore the brunt of heavy discounts which impacted its overall topline. The only silver lining in the cloud was that despite these sluggish conditions, the company was able to gain market share by 3% in the MHCV space largely attributed to gains across regions and the success of newly introduced models.

Going forward...

The outlook for the CV industry in the near term remains tepid at best as there are no clear signals yet of the economy picking up. But there exists the possibility of a recovery in the second half of FY14. This will be on the back of a lower base as well as new product launches by industry players. The long term growth prospects however continue to look robust. Both Tata Motors and Ashok Leyland in particular, intend to focus on technology and ramp up in new product launches. Moreover, it all depends on how effective the government is in ramping up infrastructure. Because if that happens, the growth in the industry will surely get a big boost.

Radhika Pandit

Radhika Pandit (Research Analyst), is one of our senior analysts with more than a decade-long stint in the field of equity research. She has helped build our pharmaceutical sector research from scratch and has a firm grasp of the Indian automobile industry. Being an ardent follower of Warren Buffett's value investing philosophy, she believes in investing in solid businesses for the long haul.


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