BS VI trucks’ better efficiency benefits will be offset by higher debt costs: IndRa

 The better performance expected in BS VI commercial vehicles (when compared with BS IV CVs) may not help the fleet operators significantly as it would be offset by higher debt costs, according to a report by India Ratings & Research, part of Fitch Group.

With respect to efficiency, a comparison of BS-VI CVs with BS-IV CVs reveals that a BS-VI CV might report better performance in terms of mileage and maintenance cost due to its on-board diagnostic system (OBD). 

However, the higher debt repayments required for BS-VI CVs, due to its relatively higher cost, would offset the benefits of lower maintenance or improved mileage, leading to stable debt service coverage ratios. Overall, all other factors remaining the same, the buying of BS-VI vehicles will be credit neutral for fleet operators, it said.

The rating agency said the implementation of BS VI norms from April 1, 2020 could lead to some short term headwinds. Considering the sharp year-on-year fall in the sales volumes of CVs since May 2019, the underwhelming pace of industrial activity and the higher cost of ownership of a BS-VI CV, the implementation of BS-VI could add to the sector’s woes. 

Furthermore, given the excess supply situation and muted demand-side fundamentals in the economy, the agency believes the pre-buying of BS-IV CVs till end-Q4FY20 is unlikely to be meaningful as compared with the earlier occasions when new emission norms had been implemented. 

Also, the pre-buying prospects have been impaired by the excess capacity, caused by revised axle load norms. Also, demand-side fundamentals remain fairly muted, as evident from the decline in the index of industrial production and the decrease in the aggregate volumes of manufacturing companies from Q1FY19. 

Assuming customers anticipate a revival in the economy and are offered incentives in the form of discounts, the sector might witness moderate levels of pre-buying of BS-IV trucks. This, however, would lead to delays in the purchases of BS-VI vehicles post 1 April 2020. Hence, the sales of new BS-VI CVs could be lacklustre in Q1FY21 and Q2FY21, unless backed by an actual improvement in economic prospects. 

Meanwhile, an underutilised fleet with flat freight costs would put pressure on the debt repayment capability of fleet owners. Consequently, the lenders would exhibit risk aversion with respect to extending credit to buyers of BS-VI vehicles by offering lower-than-usual loan-to-value and higher financing costs, especially to fleet owners whose operating cash flow would be inadequate to offset the debt repayments.

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