Why a recovery in commercial vehicle sales is still proving elusive

The mood is far from upbeat in the commercial vehicle (CV) industry. Within this category, the truck segment (medium and heavy CVs or M&HCVs) is among the worst-hit by the economic slowdown.

Data from the Society of Indian Automobile Manufacturers shows that M&HCV production in November plummeted 45.6% year-on-year, while overall CV output fell by 16.4%.

Indeed, truck manufacturers are striving hard to trim inventory levels. But here are the reasons why the pain in this segment will be more prolonged than in other segments.

Unlike cars and two-wheelers, where the buyer’s decision can be influenced by lower financing costs and attractive offers, truck sales hinge on revenue earned and commercial viability of operations.

This does not look encouraging in the near term. India’s core sector output, which makes up 40% of the overall Index of Industrial Production, fell 5.8% in October from a year ago.

Prolonged weakness in sectors such as automobiles, home sales and consumer goods, along with a liquidity crunch, is now mirrored in weak gross domestic product growth. The Indian Foundation of Transport Research and Training said: “The monthly fleet utilisation in the last 18 months has plummeted by 30-35% on trunk routes. So, reduced round trips and longer waiting period for return cargo have translated into a 30-40% drop in monthly revenue from trucks."

As a result, freight rates as on 1 December on key routes contracted from a month ago. That apart, rates have been trending down almost through 2019, barring some improvement in sales seen in festive season in October.

Meanwhile, a slowdown in government capital expenditure also implies lower utilization of trucks for the infrastructure sector.

Latest data from the Federation of Dealers’ Association shows an 8% year-on-year contraction in November retail sales of CVs, while all other segments showed an increase.

Mitul Shah, vice president (research) at Reliance Securities Ltd, said: “Overall retail sales were impacted due to the pause on incremental capex and falling freight rates amid lower agri-production."

The trend even belies expectations of a spurt in BS-4 emission norms-compliant truck purchases in the second half of FY20 to beat high-cost BS-6 truck purchases from April. Inventory is still too high at 35-40 days for manufacturers to consider production increase.

There is some solace in the light CV segment, which posted only a marginal sales contraction of 6% in November. This will partially alleviate the pain for Tata Motors Ltd, and Mahindra and Mahindra Ltd. Ashok Leyland Ltd, which has about 60% of its total sales from trucks, will be worse off in terms of revenue and margin traction.

Analysts say that CV sales slowdown usually takes 7-11 quarters to recover. Given that it is the fifth quarter of slowdown and the headwinds are still strong, a firm recovery in truck sales may be seen only in the second half of FY21.