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The long-awaited revival of India’s truck market

Imminent GST introduction, rail freight taxation, replacement demand and a mining revival: could India’s truck market be on course to fulfil earlier growth expectations? By David Isaiah

Following two consecutive financial years of declining sales, growth is once again visible in the Indian automotive industry. The state of a country’s commercial vehicle segment is a fair indicator of a country’s economic activity in the country, and India is no different.

The CV segment in India, especially the medium and heavy CV segment, has now been posting continuous growth over the past nine months. The light CV segment, on the other hand, has yet to recover from the slump. LCV sales in India have been declining for seven consecutive months.

Market recovery

Tata PrimaThe Indian CV industry began the current financial year on a positive note, posting combined sales of 45,872 units in April 2015, which translates into year-on-year growth of 6.5%, according to the Society of Indian Automobile Manufacturers (SIAM). Out of the total, the M&HCV segment accounted for sales of 19,277 units, up 24.9% compared with April 2014.
The concern for the industry, however, is the LCV segment which failed to post year-on-year sales growth, even compared with the already depressed levels witnessed in 2014. This segment managed sales of 26,595 units, dropping by 3.8% compared with the corresponding month a year earlier.

“The CV segment sales were a mixed bag for most manufacturers. While LCV sales continue to be in the slow lane, gradually increasing sales of M&HCVs indicate that the new fiscal year may bring new gains for manufacturers, based on resumption in mining activity and infrastructure spending by the government,” Abdul Majeed, a partner at Price Waterhouse in India, told Megatrends.

Due to economic development initiatives in the country, industry experts feel that the CV segment is likely to see steady growth until 2020. Such initiatives that have been announced by the government include plans to privatise ports, set up Ultra Mega Power Projects (UMPP), revive the manufacturing sector, and increase allocation to the roads and highways sector.

“Indian commercial vehicle OEMs are also enjoying a rising acceptance in the SAARC (South Asian Association for Regional Cooperation) region, the Middle East and in the African continent. Most domestic players have compensated for their sluggish domestic sales by increasing exports,” a founder and managing partner of EOS Intelligence, Indraneel Bardhan told Megatrends.

The Indian government has also started the auction of mines, which augers well for the heavy CV segment. This will especially benefit the likes of heavy truck manufacturer AMW Motors, which has significant presence in the mining sector. According to the OEM, there is definitely a recovery as far as on-road CVs are concerned; however, in terms of work trucks, such as tippers and transit mixers, the recovery in the industry is yet to take off.

“Definitely the auctions have cleared coal mining and will lead to mining getting initiated in the majority of mines across the country, but the action on ground will only commence by the second half of this fiscal. The only caveat here is the drop in the energy prices across the globe. This may lead to mining getting delayed as the user industry will be locked in a conundrum of mining the coal or buying the coal,” RN Rao, Director – Marketing, AMW Motors told this publication.

“But having said that, India is a power deficient country and the majority of power plants are thermal power plants; coal mining has to start sooner rather than later. Mining will be one of the biggest triggers for growth in the M&HCV space and overall in the growth of GDP.”

Effects of the budget

The eagerly awaited budget for the financial year 2015-16 was presented on 28 February, with Indian industry expecting much from Prime Minister Narendra Modi’s government. Earlier, the Central Statistics Office released a new series for GDP, which involves a number of changes relative to the old series. Based on the new series, estimated GDP growth for 2014-15 is 7.4%, while growth in 2015-16 is expected to be between 8-8.5%.

BharatBenz dealership inaugurationThe Indian CV industry naturally had high expectations of the new government’s first budget, specifically for further cuts in excise duty and other industry-specific incentives to increase demand. However, this was not to be. It ended up as a fairly neutral budget for the automotive industry in general.
“In order to push local manufacturing, the government increased the effective tariff rate on imported commercial vehicles from 10% to 20%, making the imports of CBUs (completely built-up units) expensive. This is in line with the government’s ‘Make in India’ initiative that encourages local manufacturing of CVs in the country. The move is not going to have any drastic impact on the industry, as it affects only high-end players like Volvo and Mercedes, which currently import not more than 1,000 units annually,” said EOS Intelligence’s Bardhan.

“The budget gave a lot by way of statements of intent, but is lacking ground level action,” said AMW’s Rao. “Lots of new projects were announced, vis-a-vis infrastructure development, smart cities and road development on PPP (Public Private Partnership) basis, but the entire industry is sceptical of PPP projects due to the projects getting delayed on account of various clearances.

“The budget does not give any clear direction on financing the new projects and also clearing up the old projects which are on hold due to various government clearances,” he continued. “The excise rollback was also lifted in this budget but the market was able to absorb it and thus we don’t see any negative impact on account of this.”

There were, of course, positives as well. For instance, the increase in infrastructure spending by the government is likely to boost the demand for trucks. Coal mine auctions too may increase mining operations, which will, in turn, spur demand.

“Old vehicle replacement is expected to drive up sales. Moreover, the budget had an increased focus on infrastructure development and investments which will help in increasing demand in the segment. It is expected that the M&HCV segment will report volume growth of 13-17% year-on-year in fiscal year 2016,” Sreeram Venkateswaran, Vice President – Domestic Sales, Product Management and Network at Daimler India Commercial Vehicles (DICV), told Megatrends.

The elusive GST

The implementation of the Goods and Services Tax (GST) is something that the entire industry has been looking forward to for many years. There is significant productivity loss owing to the many check posts and toll plazas between Indian states, resulting in massive delays. Implementing GST would reduce costs associated with logistics and distribution, resulting in better capacity utilisation.

AMW 3118 HL Cab“Under the new GST, tax rates are expected to reduce and there is likely to be a consolidation of warehouses across the country resulting in more demand for trucks for last mile connectivity. This will boost logistics efficiency. There is also a possibility of less paperwork at check posts when goods are being transported from one state to another resulting in supply chain efficiency and quick turnaround times. This will definitely generate new demand for the CV segment,” Price Waterhouse’s Majeed told Megatrends.

At the time of writing, GST implementation was expected to take place by 1 April 2016, or so the Minister of Finance says. The CV industry has been excited about GST as well. This is, no doubt, one of the biggest taxation reforms in India, as DICV’s Venkateswaran puts it.

“The commitment to implement GST from 1 April 2016 as the biggest indirect tax reform would pave the way for uniform tax structures across the states, thereby simplifying and standardising vehicle pricing. This will also help in states receiving higher revenues. Once implemented, GST would mean faster delivery times from point to point. When that happens, it will lead to faster adoption of the hub and spoke model,” he told us.

Outlook

So far, our analysis has focused on the Indian CV industry as it is today, emerging from a prolonged slowdown. Parts of the sector at least have already left behind the days of sluggish sales, and are now posting strong year-on-year growth, albeit from a low base. The budget brought no major policy initiative to directly impact the CV segment, but positives such as increased infrastructure spending will, no doubt, boost sales in the medium term. GST is still a year away, and the best the industry can do is to trust the Finance Minister’s confidence in the April 2016 timeline. So what is in store for the Indian CV sector in the medium term?

Ashok Leyland U4923TT“India’s CV industry is expected to grow at a CAGR of 5% or more during 2015-2020. Massive urbanisation will be the key driver of this growth as one of the key focuses for the new government is to create 100 more urban cities over the next five years,” said EOS Intelligence’s Bardhan. “Further, the ‘Make in India’ strategy promoted by the new government as well as resumption of mining activities will fuel further growth in the segment. The present government’s strategy to boost growth by enhancing infrastructure, improving ease of doing business, increasing public investments, etc., is expected to fuel growth in the CV industry, as well as provide growth opportunities for OEMs across the entire automotive value chain.”

Daimler India expects the medium and heavy-duty segment to be the largest and fastest growing of the commercial vehicle categories, with the focus on infrastructure development. With the hub and spoke model gaining significance, small and light CVs are expected to return to growth as well. However, growth in this segment may not happen immediately.

“Recovery in the LCV segment could be gradual, based on improvement in consumption expenditure and the availability of bank credit,” said Abdul Majeed.

AMW Motors, meanwhile, believes that the M&HCV segment is closely linked to economic development and GDP growth. The company expects growth to come from replacement demand, freight rates holding up, and the start of mining activity in the second half of the current financial year.

“The factors which will further enhance growth include firm action vis-a-vis financing of new projects in power, infrastructure and roads, clearing of old projects and increased fleet utilisation. But the government looks to be in a tight spot as far as financing these projects is concerned and thus growth may be limited to 10-12% in the CV industry,” said AMW’s Rao.

In addition to these factors, EOS Intelligence expects demand for new CVs to receive a boost over the longer term, through gradual acceptance of advanced trucking platforms, adapting BS V emissions standards, and new technologies in the Indian CV space, such as anti-lock braking systems.

“Going forward, utilisation levels are expected to improve further due to the recent hike in rail freight charges by 25-41%. As road transport becomes cheaper, the demand for new CVs is expected to rise. This will also aid in improving the credit environment for CVs, which has been particularly challenging for small fleet operators and first-time buyers due to the sharp rising delinquency levels,” said Bardhan.

David Isaiah

This article appeared in the Q2 2015 issue of Automotive Megatrends Magazine. Follow this link to download the full issue.

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