ICRA RESEARCH SERVICES

INDIAN COMMERCIAL VEHICLE INDUSTRY

Gradual improvement in industry sales likely post GST

Contacts:
Subrata Ray Shamsher Dewan Ashish Modani
+91 22 6169 3385 +91 124 4545 328 +91 020 2556 1194
subrata@icraindia.com shamsherd@icraindia.com ashish.modani@icraindia.com
 What’s Inside

1) Executive Summary

2) Update on Recent Industry Trends & Demand Drivers

3) Segment-Wise Commercial Vehicle Sales, Growth Drivers & Market Share Trends
 Medium & Heavy Commercial Vehicles (M&HCVs) Trucks
 Light Commercial Vehicles (LCV) Trucks
 Buses (Focus on SRTU segment)
4) ICRA’s Segment-wise Outlook for FY 2018 & Medium-Term
5) Financial Performance of Commercial Vehicle OEMs
6) Peer Comparison of Commercial Vehicle OEMs
7) ICRA Ratings in Commercial Vehicle Industry
8) Company Section – Performance of OEMs in FY 2017 & Comments on Credit Profile

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 INDIAN COMMERCIAL VEHICLE INDUSTRY
Industry Performance Review
Executive Summary
Domestic CV industry sales
contracted by 9.1% in Q1 FY 2018
M&HCV (Truck) segment has
witnessed have contracted sharply
in Q1 FY 2018 on account of GST
roll-out and limited availability of
BS-IV vehicles
M&HCV (Truck) sales likely to
improve gradually aided by pent-up
demand and healthy traction from
infrastructure and mining sectors
Potential scrappage policy could
aid growth
ICRA Limited
July 2017 ICRA RESEARCH SERVICES
Confluence of factors have led to sharp decline in CV sales in Q1 FY 2018
The domestic Commercial Vehicle (CV) industry ended the fiscal 2017 with a marginal growth of 4.2% (in unit sales) in
comparison to the prior year. The slowdown in growth momentum was triggered by combination of factors including waning
replacement demand, uncertainty related to pricing of vehicles under GST and relatively subdued industrial activity to support
CV sales. This resulted in overcapacity in the system and in turn put pressure on freight rates in an environment when diesel
prices had started recovering from the lows witnessed in FY 2016.
Following weak sales in the Q2 FY2017, the industry grappled with demonetisation in the third-quarter and also witnessed fairly
subdued demand in the last quarter even as transition to BS-IV emission norms was expected to result in pre-buying. The
Supreme Court's decision in the last week of March disallowing sale of BS-III vehicles post March and high system wide
inventory led to sharp increase in discounts being offered by OEMs to liquidate inventory over the last three days of the fiscal.
This coupled with limited availability of BS-IV vehicles, CV sales, especially M&HCV (Trucks) and Buses have dwindled sharply in
Q1 FY2018. In our view, with clarity GST implementation and expectation of marginal correction in vehicle prices has also
contributed to lower sales as fleet operators have deferred their investment plans. Accordingly, M&HCV sales in Q1 FY 2018
have been contracted sharply and are likely to improve gradually from Q2 FY 2018 onwards.
Pent-up demand post GST and traction from infrastructure and mining sectors to support recovery
Nevertheless, ICRA expects that industry will find its momentum back a) aided by increased thrust on infrastructure and rural
sectors in the recent budget, b) potential implementation of fleet modernization or scrappage program and c) higher demand
from consumption-driven sectors and e-commerce logistic service providers, especially for LCVs and ICVs. Given these
considerations, ICRA expects the domestic CV industry is likely to register a growth of 6-8% in FY 2018.
M&HCV (Truck): Likely to improve gradually and register a growth of 6-8% vis-à-vis flat sales in FY2017
Within the CV industry, the M&HCV (Truck) segment is likely to register a growth of 6-8% in FY 2018 aided by pent-up demand
post GST, higher budgetary allocation towards infrastructure and rural sectors, potential implementation of vehicle scrappage
program and stricter implementation of regulatory norms especially related to vehicle length (for certain applications) and
overloading norms. In addition, we also expect that National Green Tribunal (NGT's) thrust on phasing out old diesel vehicles
along with Government's proposed vehicle modernization program would trigger replacement-led demand. Apart from
favorable regulatory developments, resumption of mining activities in select states would also continue to support demand for
tippers, a segment which has outperformed the industry during the current fiscal.
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 Executive Summary
Demonetisation had put brakes on
steadily growing LCV (Truck) but
recovery has been swift
ICRA expects a growth of 7-8% in FY
2018
GST implementation and limited
availability of BS-IV vehicles
impacted Bus sales as well in 2m FY
2018
ICRA expects bus segment to
register growth of 5-7% in FY 2018
Exports face challenges in the near-
term but longer term potential is
strong supported by expanding
market coverage and new model
launches
ICRA Limited
LCV (Trucks): Replacement cycle + consumption-driven sectors to drive 7-8% growth in FY 2018
The impact of demonetisation was also felt on the LCV (Trucks) given the high proportion of First Time Buyers (FTBs), Small Fleet
Operators (SFOs) and dependence on rural markets. Nevertheless, ICRA believes that the LCV segment is on a structural uptrend
and has witnessed swift recovery with improvement in liquidity situation. In the near-term, replacement-led demand (following
almost three years of declining sales) and expectation of stronger demand from consumption-driven sectors and E-commerce
focused logistic companies would remain key growth drivers for the segment. Over the medium-term, the segment would also
benefit from roll-out of GST and its impact on logistics sector and preference for hub-n-spoke model. Accordingly, ICRA expects
the LCV (Truck) segment to register a growth of 7-8% in FY 2018.
Buses: Stable demand from most segments will result in 5-7% growth in FY 2018
In contrast to the prior year, the bus segment has witnessed lower growth (i.e. 5.7% in FY 2017). We believe this is primarily on
account of lower deliveries to SRTUs (during H1 FY 2017) on account of delays by states in submitting progress report to the
Central Government for release of funds. Apart from SRTU segment, the segment also benefitted from stable demand from
travel operators that cater to corporate travelers as well as from online aggregators.
Despite contraction in sales during Q1 FY 2018 (down 23%), In ICRA’s view, the domestic bus segment would still register a
growth of 5-7% in FY 2018 in unit terms aided by pick-up in demand from SRTU segment (backed GOI’s focus on improving
urban as well as rural transportation and focus towards smart cities initiatives). Over the past few years, the segment has also
benefitted from healthy demand from online aggregators and staff carriers segment besides Schools & College which remain a
stable source of bus market in India. ICRA research indicates that fleet replacement cycle is gradually reducing with rising
customer expectations for comfortable journey. This is likely to reduce average fleet age and spur replacement-led demand.
Exports: Short-term pain but new model launches and expanding coverage positive for medium-term
In contrast to relatively subdued growth in the domestic market, CV exports from India grew by 5% in FY 2017 aided by
expanding market coverage and healthy demand from some of the key export markets. This is despite the fact that demand
from important market like Sri Lanka was impacted by restriction on financing norms for automobiles and hike in import duties.
Moreover, macro-economic challenges and currency devaluation in select African markets also dampened demand.
While there have been near-term challenges, CV OEMs are gearing up for the long-haul and are gradually looking at expanding
their market coverage in Asian, African and Middle Eastern countries. Historically, Indian OEMs have maintained strong hold in
near-by markets of Sri Lanka, Bangladesh and Nepal but they have increased their focus on Middle East and African countries as
well over the past few years. In addition, new product line-up and technology upgradation are now allow them to enter
relatively advance markets of South-East Asia.
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 Executive Summary
CV export sales to touch 160,000
units by FY 2020
OPBDIT margins of CV OEMs to
remain under pressure in FY 2018
ICRA estimates investments of Rs.
31-33 billion p.a. by CV OEMs
ICRA Limited
CV exports to grow at a CAGR of 12-15% over the medium-term
ICRA believes that CV exports from India are likely to grow at a CAGR of 12-15% over the medium-term to touch sales of
~160,000 units by FY 2020. This will be driven by a combination of expanding market coverage by Indian OEMs in new markets
(i.e. ASEAN, Africa and Middle East), scale-up in exports from foreign CV OEMs and growing demand from some of the existing
markets in the SAARC region. In order to compete more effectively with foreign OEMs, domestic players have also renewed
their plans of setting up assembly operations in multiple markets, a strategy which had taken a back seat in the past few years.
Profitability indicators of CV OEMs likely to remain under pressure in the near-term
During FY 2017, the aggregate financial performance of five leading CV OEMs moderated on a YoY basis on a) account of
slowdown in the M&HCV truck sales, b) increase in discount levels and c) reversal in material costs because of partial recovery in
steel prices and other overheads. As a result of these factors, the aggregate OPBDIT margins of CV OEMs shrunk by 260 bps to
5.8% in FY 2017 over the same period in the previous year. The aggregate Profit after Tax (PAT) of CV OEMs was impacted by
certain exceptional one-off items such as impairments taken by OEMs during FY 2017. These were largely pertaining to
impairment of loans and investments in subsidiaries/associate companies by select entities. As a result of contraction in OPBDIT
margins and these one-off items, the aggregate RoCE of CV OEMs had contracted during FY 2017 to below 5% from 10% in FY
2016.
With lower sales in Q1 FY 2018 (on account of partial pre-buying in Q4 FY 2017 and implementation of GST), competitive
pressures (as reflected by high discount levels) and recovery in input material prices, we expect margins of CV OEMs to remain
under pressure in FY 2018. Furthermore, OEMs may not be able to completely pass on the cost related to BS-IV technology
upgradation owing to relatively subdued demand. Over the medium-term, the key sensitivity to profitability indicators of CV
OEMs would continue to be a) increasing competitive pressures (as foreign OEMs scale-up volumes on back of new model
launches and expanding sales network) and b) higher investments in developing new models and technologies (to meet next
level of emission norms).
CV OEMs to spend close to Rs. 31-33 billion p.a. on product development and other initiatives
Despite marginal contraction in margins, we expect credit profile of CV OEMs to however remain stable in the near to medium
term on back of relatively limited capital expenditure requirements. As industry’s capacity utilization levels remain around 50-
55%, most OEMs are unlikely to invest in Greenfield units over the next 2-3 years. This would mean that overall investments will
be limited to a) new product development, b) addressing portfolio gaps and c) technology upgradation related to next level of
emission norms. With an eye of growing international business, some of the OEMs are also contemplating setting-up assembly
units overseas. ICRA estimates the CV OEMs will spend approximately Rs. 31-33 billion p.a. (on aggregate basis) over the
medium-term in the aforementioned areas.
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