Commercial vehicles face grim near-term outlook: Care Ratings

Domestic commercial vehicle sales are expected to decline by 30 to 35 per cent in the current financial year as the industry is staring at further de-growth while the Covid-led economic downturn adds to negative sentiment, according to Care Ratings.

The dip in sales is going to be more severe in medium and heavy commercial vehicle (M&HCV) segment than the light commercial vehicle (LCV) segment. In FY20, the domestic commercial vehicle industry clocked sales of 7.17 lakh units.

"The contraction in LCV segment is expected to be limited as demand from rural and semi-urban markets is expected to recover faster on account of higher agriculture output on the back of good monsoons during the current year," said Care.

Truck utilisation levels remained under pressure during Q1 FY21 (April to June) due to Covid-19 lockdown and various restrictions on movement across the country.

Industry body associations say fleet utilisation among operators was 30 to 35 per cent during May and has gradually risen up to 50 to 60 per cent during June as more sectors opened up after relaxation of lockdown restrictions.

Also, currently truck fleet operators are witnessing a shortage of drivers as most of them had returned to native places in view of the nationwide lockdown. Demand environment is expected to remain low in the coming months as well due to the slowing economy on account of Covid-19 impact.

Given the overcapacity situation, freight rates are expected to remain under pressure despite an increase in diesel prices which could impact the profitability of fleet operators during FY21. Therefore, said Care, it is expected that fleet operators might defer their new commercial vehicle purchases in the near-term.

The overall volumes are expected to gradually pick up during H2 FY21 from the current lows. "However, any meaningful demand recovery is expected from FY22 only."

While this is likely to impact the financial performance of various domestic commercial vehicle players, a majority of them are better placed to manoeuvre the downtrend than in the past.

Demand revival could be hastened in case of implementation of long due scrappage policy, reduction in Goods and Services Tax rates from the current 28 per cent along with substantial economic measures including the government's push towards additional infrastructure projects.