‘Credit outlook for CV players seen stable despite a sober volume growth forecast

Medium and Heavy Commercial Vehicles (MHCVs) volume growth will be subdued at around 4 per cent this fiscal, compared with strong double digits in fiscals 2018 and 2019, according to Crisil. LCV volumes, too, would moderate, but still grow at a healthy 9 per cent, the rating agency forecast in a statement.

“The first half of this fiscal is expected to be weak because of change in axle norms, soft freight rates, subdued economic growth, and lingering liquidity crunch impacting non-banks, which finance about half of CV sales. However, in the second half, fleet operators are expected to advance their purchases planned for fiscal 2021 because vehicle prices are seen increasing 9-11 per cent following the transition to BS-VI emission norms. That would lend a fillip to sales,” according to Crisil. “Additionally, the transition to BS-VI norms is expected to increase the weight of an MHCV by 300 kg on an average because of additional exhaust management components — unless manufacturers opt for costlier lightweight materials,” said Hetal Gandhi, Director, Crisil Research.

“That would mean a 2 per cent reduction in the average MHCV payload of 18 tonne which, in turn, would impact the profitability of transporters and also encourage pre-buying,” she added.

The benefit of pre-buying will be partially offset by inventory liquidation. With the Supreme Court barring registration of BS IV vehicles after March 31, 2020, dealers would begin liquidating BS IV models as the deadline nears, Crisil said.

“In the milieu, CV makers will have to walk a tightrope between sales growth and inventory liquidation. Excess production would mean higher discounts or write-offs. Tepid volume growth and stable pricing would mean overall CV industry revenue would rise around 8 per cent to around ₹120,000 crore this fiscal. However, despite the moderation, the credit outlook for the CV industry is expected to be stable. That’s because of steady operating margins stemming from benign forecast for steel and aluminium prices, and high capacity utilisation of around 80 per cent,” it added.

CRISIL further stated that in the wake of a decisive mandate in the recently concluded general elections, stable economic policies, higher infrastructure investments and gradual recovery in consumption could bode well for the CV sector over the medium term. Declining interest rates would also provide a tailwind to demand.

COMMENT NOW