India’s commercial vehicle (CV) segment was already battling falling sales when the Covid-19 pandemic made it worse. In 2019-20, according to industry body the Society of Indian Automobile Manufacturers (SIAM), CV sales dropped 29 per cent to 717,688 units—from its peak of 1 million in FY19—because retail financing took a major hit and there was a transition from BS-IV emission norms to stricter BS-VI norms. In FY21, after the pandemic hit, CV sales plunged 21 per cent to 568,559 units. During the first nine months of FY22, sales improved to 531,702, compared to 388,497 in the corresponding period in FY21.
As infrastructure development projects pick up, and the logistics and e-commerce sectors grow, coupled with easing of financing options, companies including market leader Tata Motors and other players like Ashok Leyland and Volvo Eicher Commercial Vehicles (VECV) are betting on the recovery of the bus segment, pent-up demand and CNG to cross the bridge between recession and recovery. “We expect CV volumes to gradually recover to pre-pandemic levels over the next three years,” says Sanjeev Kumar, Head of M&HCV (medium and heavy CV) at Ashok Leyland.
It won’t be easy, though. According to ratings agency ICRA, key headwinds for the sector include elevated commodity prices and rising fuel costs, which are impacting the cash flows of truck operators. As petrol and diesel prices have risen umpteen times in the past month, a rebound to the industry’s 2018-19 peak seems further away. “When fuel prices increase, transporters are hit very badly, which means they become conservative in going for replacements. It puts pressure on us as they are our customers,” says Vinod Aggarwal, MD and CEO of VECV. Pushan Sharma, Director of CRISIL Research, adds that the increase in diesel prices hurts small fleet operators most since they are unable to fully pass on the input cost increase during a weak freight demand environment seen during FY21 and the first half of FY22.
Other key challenges include semiconductor shortages, intense competition and rising vehicle prices. Vehicle prices have increased by over 20 per cent in the past 15-18 months to accommodate rising commodity prices and regulatory requirements, especially emission norms. Girish Wagh, Executive Director at Tata Motors, says that the commodity price rise, especially steel and precious metals, necessitated the company to increase prices. However, he adds that “the company has strived to minimise the increase in prices by absorbing a certain portion of the cost at various levels of manufacturing”.
Despite the challenges, there is hope on the horizon.
Green Shoots of Recovery
The Automotive Component Manufacturers Association of India (ACMA) is cautiously optimistic. “On the CV front, it seems to be going well as CVs suffered quite a bit in [the past] two-three years because of the demand pattern changing and because of new axle-load norms,” says Vinnie Mehta, Director General, ACMA. (In 2018, the maximum safe axle weight in a vehicle of single axle with two tyres was changed from 7.5 tonnes to 7 tonnes. The government had also increased the official maximum load carrying capacity of heavy vehicles, including trucks, by 20-25 per cent.)
Tata Motors’ Wagh expects a strong drive on infrastructure spending by the government to improve demand across segments in FY23. “Critical sectors including e-commerce, FMCG, FMCD (fast moving consumer durables), construction, mining, steel and cement will continue to drive demand in the M&HCV and I&LCV (intermediate and light commercial vehicles) segments. Similarly, the SCV segment is expected to grow on the back of resilient demand from the agriculture-, dairy-, and e-commerce sectors. We expect a recovery for passenger CVs from the first quarter of FY23, with the reopening of offices and schools, and increased activity in the tourism sector,” says Wagh.
Experts say that CV demand is currently supported by the gradual recovery in economic activities, thrust on infrastructure spending, favourable freight rates, stable financing environment and improved utilisation of fleet capacities. “While rural sentiments continue to be subdued, other factors like improving mining and construction activities, deferred replacement demand, last-mile transportation, e-commerce logistics, etc., are expected to support the demand. Also, with schools and colleges gradually opening, the demand for buses will also come back,” says K. Srikumar, Vice President and Co-Group Head, Corporate Ratings of ICRA.
Earlier, peak levels of bus industry was around 70,000-75,000 units whereas today, it’s a shallow 16,000 units. “We’re expecting very good recovery in the bus segment on the back of schools opening up, pent-up demand and tourism. The sector is coming back very strongly,” says Aggarwal of VECV.
When it comes to LCVs, smaller towns and cities are expected to be big growth drivers. “The pandemic has created an excellent opportunity for expansion in Tier II and Tier III cities, particularly in the LCV category, which formerly relied solely on metro cities as their big volume drivers. Also, transportation of fruit, veggies, e-commerce and other consuming sectors driven by doorstep delivery of critical commodities has fuelled the need for last-mile connectivity. With this, we expect LCV volumes to continue to rise,” says Rajat Gupta, Head of LCV at Ashok Leyland.
According to the company, the M&HCV segment is also seeing strong demand growth. “Because of the improved macroeconomic situation and demand from end-user sectors, the CV industry is currently on a recovery path. On the back of development in core sectors such as construction and mining, higher capital outlay for infrastructure projects, a favourable financing environment, and pent-up replacement demand, the M&HCV segment is likely to lead the rebound in the coming months,” says Kumar of Ashok Leyland.
He expects the company to see a significant upturn in heavy-end goods (such as construction material, machinery and vehicles). “The sentiment of the market and customers are very strong. We see a lot of demand especially in the heavy-end goods, where Ashok Leyland will see a very significant upturn. There was a large growth in the ICV (intermediate commercial vehicles) segment, within ICV in the CNG segment, which helped us capture the market back,” he says.
VECV’s Aggarwal, too, says that migration from diesel to CNG is a big business opportunity for the industry. “We’re seeing a lot of migration happening from ICE and diesel to CNG. Alternate fuels like CNG and LNG will be a big growth driver for us. Also, there’s a huge pent-up demand of replacements especially for heavy and medium duty trucks because the normal replacement cycle is five years and that hasn’t happened since the last peak,” he says. VECV is also hopeful because of the government’s infrastructure push.
Tata Motors, too, believes that government initiatives will play an integral role in the growth of the CV sector. The scrappage policy, for example, will be critical for the entire commercial vehicle business, Wagh says. “Subsequently, the recently announced Gati Shakti project along with the government’s heightened focus on infrastructure projects, and fiscal support for capital expenditure to state governments will boost the demand for M&HCVs. The government’s performance-linked incentives (PLI) scheme is another crucial element that will prove vital for the overall CV sector and its growth prospects,” he adds. “With 27 per cent growth in volumes in FY22 over FY21, and the positive drivers, we expect the industry to continue on the growth curve.” Wagh expects the SCV&PU (small commercial vehicles and pick-ups) segments to do well on the back of strong demand from the agriculture, dairy and poultry sectors, as the sentiments continue to gradually improve.
Buses to Lead Transition to Electric
The government is keen to accelerate the transition towards sustainable transportation, and CV makers believe that buses are in the best position to go electric. Electric buses are already gaining traction in public transport. “Today, more than 650 Tata Motors e-buses are running on Indian roads, which have cumulatively run more than 25 million km. We believe there is strong potential for growth,” says Wagh. CRISIL’s Sharma expects EV penetration to be led by buses (due to state transport purchases) and LCVs used in intra-city goods movement, but doesn’t expect EVs to drive overall CV growth.
In the case of last-mile distribution, too, there is an increasing demand for electric SCVs, as many e-commerce companies are aiming to shift to zero emission fleets and reduce their logistics cost. “This is another segment wherein the government is pushing for increased penetration of EVs to reduce emission levels in cities and promote eco-friendly, noise-free electric vehicles. NITI Aayog has already launched the ‘Shoonya’ campaign to accelerate adoption of EVs in the urban deliveries segment and create consumer awareness about the benefits of zero-pollution delivery, and Tata Motors is actively supporting these initiatives,” Wagh says. Electrification, he adds, will provide unique growth opportunities even in commercial vehicles, as more and more segments/applications will start becoming attractive for EVs as the battery prices progressively decline over the coming years, and the supporting infrastructure keeps on improving.
According to ICRA, too, first the bus segment will be electrified followed by other segments. “Electrification would first gain traction in the bus segment, before spreading in the goods carrier segment. Within the bus segment, the traction has started with SRTUs (state road transport undertakings), which are able to take the benefit of FAME II subsidy. Multiple tenders are being floated by various state transport undertakings, and induction in certain cities has already started,” says ICRA’s Srikumar.
VECV’s Aggarwal says the next two to three years will be crucial for the CV segment to realise its true growth potential: “We’ve already gone through the recession cycle; now it’s time for the recovery cycle.”
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