A new report by Crisil states that the commercial vehicle market is heading towards positive growth in the coming days and will recover slightly from the fall due to COVID-19.
Rating agency Crisil has said that the second wave of Covid-19 will limit the domestic CV (commercial vehicle) sales volume to 23-28% this fiscal, as against the expected 32-37%. Crisil's research note said there was a sharp recovery from lows this fiscal, but it will weaken in the first quarter due to the second wave of the pandemic. In April, freight rates fell 20%, while diesel prices remained high, hurting fleet operators.
It also said that with the lockdown widening in May, freight traffic, and consequently the profitability of fleet operators, will remain under pressure, weighing on demand, at least in the first quarter. As the lockdown eases from the second quarter onwards, freight demand and rates may normalize, which should help CV demand.
Stating that volume growth had hit a decade low in the last fiscal, Crisil said the credit metrics of CV manufacturers were expected to improve as margins expand on better capacity utilization and product mix. The CV market witnessed two consecutive volume declines, 29% and 21%, in 2020 and 2021, respectively, after several headwinds such as revised pivot norms, BS-VI transition and the pandemic.
Director of Crisil Research, Hetal Gandhi, said, "The volume of MHCV was hurt more in the last two financial years. Driven by the government's emphasis on infrastructure and a revival in economic activity, this financial year should see strong growth of 35-40%. The volume of LCVs may grow by 15-20%, given last-mile demand from e-commerce, consumer staples and replacement markets. The demand for buses may grow 67-72% due to the closure of schools and lack of demand from state transport undertakings and corporates but will remain at a multi-year low. Total C volume will still remain 30% below FY19 levels."
Original equipment manufacturers (OEMs) are unlikely to get a boost from the wholesale push, as dealer inventories were at a very high 35-40 days at the end of March against the normal level of 25-30 days. There was a sharp increase in inventory in the second half after near-zero inventory at the beginning of the last financial year due to the BS-VI transition.
“However, one main positive thing that will happen this year is the rapid growth in revenues. A better product mix will lead to higher average realizations due to higher sales of costlier MHCVs than LCVs. As raw material cost inflation, especially steel prices, is expected to be largely passed on to consumers as in the last fiscal, with both BS-VI and commodity inflation increasing by 10-15% in prices Viewed'' Crisil said.
Associate Director of Crisil rating, Naveen Vaidyanathan, said, "Higher revenues, coupled with better capacity utilization by 38% to 45%, and control over fixed costs will help CV manufacturers to improve operating margins by up to 7% this year. Last year, the companies achieved operating margins of 4.4% despite decade-low volumes due to significant operational improvements and reduction in fixed costs. But notably, margins this year will still be lower than the average 9.5% achieved from FY 2016 to 2019."
With improved profitability, capital expenditure, sharply cut last year, should exceed the average level this year. Still, higher profitability will boost free cash flow generation and help lower debt. It said, "It will support improvement in credit metrics, interest cover should enhance 3.6 times from the low of 1.5 times in the last financial year."
With the easing of the lockdown and the pace of vaccinations picking up, the forecast improves demand from the second quarter. Crisil said that the third wave of Covid-19 might further dampen the sentiment.