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CVs: 1HFY03 in review

Nov 25, 2002

It has been a happening year for commercial vehicle sector with volumes growing at a stellar rate in the first half of the current fiscal year. We analyse the monthly performance in FY03 and the sector's future growth prospects. Since Ashok Leyland (ASOK) and Telco are dominant players in the Indian CV sector, the monthly performance, to a large extent, represents the sectoral volume performance. Total CV volumes (including medium and heavy commercial segments (M/HCVs)) have risen by 29% YoY to 51,200 units till October 2002. Gauging by monthly volumes till October 2002, Telco has clearly capitalised on the upturn in the CV sector given its national presence, which is not the case with ASOK. Our interaction with both the companies' suggest that there has a marked rise in demand in the Northern markets. In the last two years, CV demand was sluggish in the Northern region primarily on account of postponement of fleet additions programme by transport operators in light of unfavorable macro environment. Thus, demand accrual over the last two years has translated into higher volume growth, especially in the Northern market.

M/HCV monthly performance...
('000 units) Apr May Jun Jul Aug Sep Oct Total
Telco 4.7 5.2 5.4 4.9 5.7 6.4 7.1 39.3
% YoY growth 28.0% 101.4% 35.6% 16.6% 30.3% 13.9% 41.8% 33.8%
ASOK 1.6 1.6 1.7 1.3 1.7 2.2 1.6 11.8
% YoY growth 45.7% 20.6% 1.3% 20.0% -2.3% 39.6% -2.8% 15.4%
Total 6.3 6.8 7.2 6.2 7.4 8.6 8.6 51.2
% YoY growth 32.1% 73.8% 25.3% 17.3% 21.0% 19.6% 30.9% 29.0%
Source: Company websites and our estimate

Given the recovery in industrial sector and bumper output in FY02, tonnage demand has increased at a sharp clip in the Northern region consequently adding to the volume growth. On the other hand, demand in the Southern region has remained stable throughout this period and as a result, ASOK's performance has been erratic in 1HFY03. ASOK only has a 20% market share in the Northern market. Another key growth driver is the ongoing road construction project that has resulted in higher demand for multi-axle vehicles with tonnage capacity in excess of 16 tonnes. Based on monthly M/HCV numbers, Telco has extended its market share to 76% in 1HFY03.

If one were to go a step further and include the performance of passenger delivery vehicles (PDVs) i.e. buses, volumes till October 2002 has increased only 13%. Clearly, dismal state of State Transport Undertaking (STUs) and lack of initiative by the respective state governments' to raise fares continues to have a bigger impact on the PDV segment. We expect the trend to continue in the near future despite the fact that the current capacity utilisation for STUs ranging between 120%-130%.

As far as freight rates are concerned, after rising by 10% and 4% in 1QFY03 and 2QFY03, rates seem to have softened further in the higher tonnage segment. But if the recent media reports are to be believed, freight rates for the 9 tonne segment have increased by around 10%-15% in the last few weeks, which is a positive sign. There is could a spill over effect from the lower tonnage segment.

We remain optimistic of the long-term growth prospects of the CV sector. The government’s proposed road network enhancement project, which includes the ambitious Golden Quadrilateral stretch that aims at connecting the four metros of the country. Cumulative government spending on improving road network is estimated to be around Rs 250 bn over the next eight years. This will help increase employment, boost demand for commodities like cement, steel and other materials. Since the materials have to be transported by road, CV demand is expected to increase in the long run. As road construction gains momentum and nears completion, we expect trailer volumes to rise significantly due to economies of scale. Overall, we expect M/HCV demand to grow at a CAGR of 8% over the next five years.

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