28 Feb 2022
This financial year has shown a bright spot for the commercial vehicle (CV) industry, while the auto industry has had a challenging year. The Auto Industry has faced a de-grew by 1%, while the CV industry rose by over 30% (up to Q3 FY22), Although compared to last year's low base. The question arises: Are the recent CV sales numbers an aberration or the first step on the path of a sustainable recovery?
The commercial vehicle industry has recently received much attention as the industry has performed very well in the last few months. In the last few months, the CV industry has performed well. We analyse the industry's performance in detail to understand whether this is a short term aberration or the path to a long term permanent recovery. We analyse the performance of the CV industry and also check the truck operator's performance this year. We'll also highlight the key trends we've seen this year and finally summarise what to expect from the industry in the coming year.
1. Commercial Vehicle Performance
Despite the challenges posed by Omicron, the CV industry's steady month-on-month growth and resilient performance have helped it in its comeback phase. The following is a close-up analysis of the industry's performance this year.
A) The Second Best Performer
The CV industry is the second-best performer at 30% in FY21, whereas the industry saw a decline in the volumes in FY20, down 18%. The three-wheeler industry is constantly to be the highly affected segment during pandemics.
B) All Truck Segments Growth
CV industry growth was well distributed across the Small Commercial Vehicles (SCVs), the Intermediate & Light Commercial Vehicles (I&LCV) and the Medium & Heavy Commercial Vehicles (M&HCV). I&LCV volumes are almost back to pre-Covid levels, and the M&HCV segment closely follows them. The small commercial vehicle segment was affected a few months earlier in the year because of a shortage of semiconductors and is expected to rebound in the last 2 months of the year. While the passenger segment reported growth over last year, it continued to lag significantly behind volumes in the Pre-Covid period.
C) Top 5 Manufacturer Performance
All the CV makers have seen good growth compared to last year. The industry leaders Tata Motors, Ashok Leyland and VECV, have all seen great growth in volumes over the previous year. Another CV maker Maruti also continued to impress in the last 2 years despite the pandemic.
However, Mahindra's sales were affected by a supply shortage of semiconductors which are important for its SCV range of vehicles. It affected its supply between August and December. But we look forward to growing Mahindra Volume in the last 2 months of the year as the shortfall has been addressed.
2. Truck Operator Profitability
Commercial vehicle sales depend on the truck operator's profitability and use of the existing trucks in the market. Changes in operator profitability depend on the prevailing freight rates and diesel prices ( As diesel still accounts for over 40% - 60% of operating expenses).
To better understand the demand of the market, we have used a couple of leading indicators, E-way bills and Fastag collection. They offer a strong insight into the truck's overall utilization in the market. In conjunction with freight rates and diesel prices, these indicators give a better understanding of the viability of operators.
A) Fastag Collection Grows By 82% YoY
Commercial vehicles play a major role in the toll collected at toll booths across India (a random check across toll booths indicated that they account for nearly 70% to 90% of the collection). The toll collection has increased by 82%, and we have also seen consistent growth month on month until December 2022. It is also clearly shown that the impact of Wave 2 of the pandemic was vastly less than that of Wave 1. It indicates that there has been a sharp increase in freight traffic this year.
B) Over 31% E-Way Bills Are Issued This Year
E-way bills have risen by 31% to Rs 63 crores from 48 crores last year. The volumes of fright have also been more consistent this year. A brief look at the e-way bills issued in the July to December period indicates that they crossed 6 crore bills every month in that period this year, as against just 2 months in the same period last year.
C) Consistently High Truck Utilization Levels
The utilization of trucks has stayed strong and has remained consistent month after month this year. Truck operators have benefited from the economy's growth and the goods movement's recovery post-Wave 2 of the pandemic. Since July, usage levels have been consistently over 74%, except in November, which fell to 70% after the holiday season. Utilization levels have remained better than last year, including the peak months of December and January this year.
D) Rising Freight Rates VS Flat Diesel Prices
Until wave 2 of the pandemic, the hike in diesel prices had led to a steady increase in freight rates that had lagged. However, the freight rate hike since May has outstripped diesel prices. It is a big relief for the truck operators who provide some much-needed relief after 2 waves of the pandemic. However, we also anticipate that once there is a hike in diesel prices after the election, freight rates will lag behind the hike in diesel prices once again.
E) The Profitable Operator
As the Indian economy continues to strengthen after the pandemic, operators' financial health improves. High goods movement has led to more truck utilization, which has helped improve freight rates. It provides better income for operators this year.
The truck operators have also received temporary relief from flat diesel prices because of Indian government policies during the elections. However, other expenses continue to increase. BS6 truck costs have grown by over 25% to 40% over similar BS4 trucks, leading to higher EMIs. Shortage of drivers has led to growth in driver salaries. The cost of tyres and lubricants has also increased significantly in the last few months, along with rising fuel prices. It has resulted in a significant increase in the total cost of operation for the operators.
The overall financial health of operators has improved despite these challenges. The financiers we spoke to recently have indicated that occupancy of trucks is now back to pre-pandemic levels. All this bodes well for healthy fundamentals which augur well for the bright future of the CV industry.
3. Highlights of the year 2021-22
A) 3 Quarters
Disclosing broken CV sales quarter by quarter. Pandemic Wave 2 significantly impacted first-quarter sales (even if they were much better than a year ago). However, sales in both Q2 and Q3 matched pre-pandemic sales. It shows that the industry is on its way to reaching steady pre-pandemic sales.
B) Selective Sector Growth
Some major sectors within the CV industry have seen inconsistent growth this year. E-commerce has made considerable inroads in Pandemic, which has benefited operators, especially in the E-commerce and parcel/courier segment. Likewise, the operators in CNG cascade transportation, FMCG and Infrastructure contractors have also seen high growth. While other segments have seen improvisation in usage this year as against last year, they haven't seen pre-pandemic use yet. Growth in urban India has also accelerated while rural India continues to lag slightly behind. Geographically, the development is led by the states of the north and west, followed by the states of the south and central. At the same time, the former is lagging.
C) CNG Variants Improving
The CNG variant is slowly becoming a highly preferred variant in commercial vehicles. Two notable benefits of the CNG variant are that it is cheaper than diesel (partly due to subsidies). And, it is a green fuel (with lower CO2 emissions). At the same time, the Indian government is also pushing for an increase in CNG dispensing stations which make this transition efficient and quick. In Quarter 2 and Quarter 3, CNG was the preferred variant across the I&LCV and SCV range of trucks. Tata Motors, a leading brand, recently talked about its sales of 44% in I&LCV and 33% in SCV came from CNG until Jan 22. Other makers also indicated the same sales numbers. While Ashok Leyland missed this opportunity last year, it has recently showcased a truck range that is now ready to take advantage of the growth potential in this coming year.
D) Used Truck Prices Break Records
The price of used trucks' fast-moving models has grown between 15% to 30% over the last few months. The combo of BS6 trucks' high prices, increasing demand for used trucks and high truck usage have increased their resale value.
4. What To Expect Next Year?
A) Geopolitical Situation
The ongoing conflict between Ukraine and Russia will affect the global economy. It also creates high levels of uncertainty in the World. As Russia is a major crude producer, which will impact the prices of diesel significantly. While the effect on the Indian economy may be small, it may throw a challenge to our anticipated growth rate, which may impact the CVs sales.
B) Static Growth
The fundamental points indicate the starting of a strong recovery in the CV industry. The demand for moving goods keeps the usage of trucks high and the freight rate stable. Currently, operators are profitable and increase the demand for new trucks. The CV industry should see continued growth as the economy grows to pre-COVID levels from next year. CRISIL recently shared that they expect the CV industry to raise between 18% to 23% in the coming year.
C) Low Impact Disruptions
Almost every industry has been affected by disruptions, some of them highly. The commercial vehicle industry will expect a low level of disruptions to operations in the coming year because of Covid. Consistent policies for containment based on the central and state levels will limit disruptions in the market and provide leeway to the industry for continued growth.
D) Increasing Diesel Prices
The ongoing conflict between Ukraine and Russia has added to the pressure of already high crude prices. Even before the conflict, Goldman Sachs expected crude oil prices to cross the USD100/barrel mark this year and next year by the second quarter of 2022. The struggle has already propelled prices beyond USD100, ahead of Goldman's predictions. Increased prices will, in turn, translate into higher freight rates. While these will be delivered to the end consumers, as the cost of goods increases, volumes will again be under pressure, creating challenges in utilization. Since diesel prices are currently subsidized for the ongoing assembly elections, we expect a significant double-digit increase in diesel prices very soon.
E) More Sectors Joining The Party
More segments will see improvisation in the prospect for growth as the economy continues to grow. Transit mixers, Tippers, cement and steel transportation will benefit from the government's infrastructure push. Rural India will also benefit from the schemes disclosed in the budget and a strong monsoon. These factors indicate a more broad-based recovery in many regions over the next year.
F) Time To Replace Older Trucks
Most truck operators have limited the truck purchasing for new contracts, with only a few replacing their older fleet. The replacement has taken a back seat because of worries around disruption due to the pandemic. We expect that more operators will go in for replacement and modernization of their existing fleet in the coming year.
G) CNG As A Highly Preferred Variant
CNG variants were majorly sold in the NCR region until Q2 2022. However, with the hike in diesel prices and expanding network of filling stations, CNG has become a popular option between CV buyers. We expect this trend to continue, and if diesel prices remain high, the CNG variants will soon overtake the diesel variants in sales.
H) Excellent New Products
All OEMs are currently improving their portfolio of new products. Minister for MoRTH Nitin Gadkari gave the task to OEMs to develop flex-fuel engines which can run ethanol, petrol or their blends. Also, all OEMs are working to develop CNG engines that can work with M&HCV trucks. We also expect the introduction of EVs in the SCV segment in the future. All the major CV manufacturers have made some of the biggest commitments by the Government of India to invest in the recently concluded automotive PLI.
I) The Risk Of Not Charting India's Fuel Route
The central government needs to chart a fueling path for the future. OEMs need to understand where to invest their R&D in maximizing their returns for the future. While a good portion of CNG is extracted domestically, India continues to import a major part of its requirements, and the global prices for it are rising. Also, the government is encouraging OEMs to focus on flex-fuel engines, EVs and LNG. If the government delays in setting a clear path, it will lead to huge capital infusion risks, which could lead to OEMs losing their edge over startups that invest capital in niche technology.
J) Expecting The Next Supply Chain Disruption
OEMs already have to deal with the growing volumes, rising diesel prices, input costs and changing policy. The global semiconductor crisis impacted the Mahindra SCVs supply this year. Likewise, the CV industry has also faced a supply shortage of components used in CNG vehicles because of the sudden boost in demand. As the industry becomes more sophisticated and the number of component suppliers dwindles, the next shortage may not come from semiconductors or CNG components but elsewhere. OEMs best prepared to plan for the next supply chain disruption will have an edge in sales.
In short, we believe that the CV industry is on the verge of a breakout year of sustainable improvement next year. Fundamentals remain strong, and operators, OEMs and financiers look to capitalize on the growth opportunities.
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