ICRA: Commercial vehicles volume to contract 25-28% in 2021

ICRA Ratings has opined that the outlook for the commercial vehicles (CV) sector remains ‘Negative’ on the back of continuing challenges like overcapacity, subdued freight availability, financing constraints etc – all of which have compounded due to the pandemic. It expects the volumes in FY2021 to contract by 25-28% thereby bringing industry volumes down to the lowest levels in more than a decade. ICRA conducted a detailed survey in October to gauge the trends at the ground level and to understand the current challenges of the sector. The extensive survey covered 11 states and 26 CV dealers.

Vice President, ICRA, Shamsher Dewan, says, “The domestic CV segment was in the midst of several headwinds in FY2020 and witnessed volume contraction of 29%. The industry had been expecting the down-cycle to extend into the current fiscal as well, as increased vehicle prices post-transition to new emission norms (BS-VI) would have added to the existing plethora of challenges, however, the extent of the contraction has been worse than expected, on account of the challenges brought about by the pandemic. The existing challenges such as overcapacity in the trucking system, subdued freight availability due to a weak macroeconomic environment, financing constraints, and stress on the cash flows of fleet operators, have all exacerbated with the onset of the pandemic, and the lockdowns imposed to contain the same. Fleet operators have pushed new vehicle purchases to the backburner, as is evident from the 85% and 55% contraction in overall CV retail volumes witnessed in Q1 and Q2 FY2021 respectively.”

An overwhelming 85% of the dealers indicated that sales volumes continued to contract till September 2020; and despite the sequential improvement, the current demand environment remains overall muted, as challenges abound in the system. Nearly 73% of the survey respondents indicated a further Y-o-Y contraction during the quarter, despite the low base. As the CV sector is heavily dependent on financing (>90% penetration), hurdles in securing financing remain a major impediment to sales. One of the key challenges highlighted was that the stress in the fleet operator segment had turned financing institutions increasingly cautious in lending to the CV segment. This is reflected in the trend of lower Loan to Value (LTVs) ratios, higher rejection rates, and increased turnaround time in financing.

The survey also indicated that inventory levels reported by 50% of the dealers were less than 3 weeks, while that for another 42% was between 3 and 5 weeks. The OEMs have had to extend limited support in the form of financing or incentives to dealerships during this period, as inventory levels were quite low. Additionally, they have been supportive in not pushing excessive inventory towards dealerships, as the demand environment remains subdued. Dealerships have also turned cautious on the discounting front, with more than half the dealers indicating discount levels of less than 10%. This is significantly lower than discounts reported last year as dealers struggled to liquidate the BS-IV inventory that would turn obsolete with the transition to BS-VI norms from April 1, 2020.

He further added, “ICRA expects double-digit contraction with the impact to be higher for the M&HCV (truck) and the buses segments. The LCV (truck) segment is expected to fare better, supported by warm rural sentiments and increasing requirements for last-mile transportation. Although growth is likely to be optically better in FY2022 at 24-27%, the recovery to industry volumes of even FY2017 levels would remain some time away.”