ICRA continues to maintain a negative outlook for the commercial vehicle (CV) segment over the near-term, as the spread of the coronavirus has aggravated existing factors like the slowing economic growth, current overcapacity in the CV ecosystem and the difficult financing environment.
The volumes are likely to contract further between 8-10 per cent in FY20-21, the credit rating agency said in a statement on Wednesday.
The demand headwinds are expected to continue over the near-term, coupled with weakening financial profile of fleet operators and significant price hikes because of the transition to BS-VI emission norms, it said. This would exert pressure on earnings and the overall credit profile of CV OEMs, which have witnessed sharp earnings contraction over the past 3-4 quarters, it noted.
The M&HCV (trucks) segment has been significantly impacted over the past year, with volumes contracting by over 40 per cent in YTD FY2020, said Shamsher Dewan, Vice President, ICRA.
Coronavirus impact
“The rapid spread of coronavirus and the lockdown imposed in the country has had a significant impact on goods movement and freight availability over recent weeks and may to continue over the near-term. Accordingly, the outlook for the next fiscal, especially the first half, remains weak given the macroeconomic headwinds in view of recent pandemic outbreak coupled with significant price hikes because of transition to the new emission norms. Any recovery in the latter half hinges on pick-up in construction activity,” said Dewan.
However, despite some channel inventory filling measures of OEMs, M&HCV (Truck) sales are expected to close the upcoming fiscal with further decline of 12-14 per cent during FY20-21e, he added.
Despite recovery expectations during the latter half, the LCV (Truck) segment is also expected to contract further by 7-9 per cent during FY2021e.
Passenger carriers hit too
The passenger carrier segment, while relatively insulated from the impact of the reduced load availability, is also expected to report demand contraction in the next fiscal, it said. ICRA expects the segment volumes to contract by 8-10 per cent during FY2021e.
“ICRA believes an improvement in economic environment and resolution of liquidity constraints remain critical for a sustained revival in the industry. In absence of either, we maintain a subdued outlook for the industry for the next fiscal,” said Dewan.
Furthermore, any unsold BS-IV inventory and their write-off can also exert pressure on CV OEM’s profitability. Accordingly, ICRA expects profitability and credit metrics of CV OEMs are likely to remain under pressure over the near-term, it added.