Indian commercial vehicle industry sales analysis and trends forecast – March 2020

Like the rest of the broader economy, the auto sector's performance in the month was a complete washout due to COVID-19, thus dragging down the FY'20 numbers. As the government scrambles to find ways from this economic collapse, the auto sector & the CV segment is likely to witness a bumpy ride over the next two quarters. We analyse the industry's performance in the month and the way forward.

The fiscal year 2019-20 turned out to be a forgettable year for the automotive industry with massive challenges throughout and the brutal COVID-19 crisis at the near end of the year. World-over governments, policymakers and health experts are trying to find a solution to this global problem, yet, the economic impact of this pandemic on business is rather catastrophic; the entire focus for last one month has been to save lives more than saving the economy.

The commercial vehicle industry is strongly interlinked with underlying economic activities. The spread of the global pandemic still looms-large, which is hurting the economy, and the future looks rather subdued. This was visible in the March 2020 sales number of the domestic CV industry with a near-breakdown of the market.

Piling Losses

Industry body SIAM predicted a massive financial loss to the industry due to the OEM plant's shutdown across India. The industry was already reeling under severe degrowth and the pressure of disrupted supply chain, which was followed by a majority of the auto companies announcing a shutdown of their manufacturing units in the last week of March 2020, due to concerns over ensuring workplace safety & health of their employees.

Speaking on the industry performance in the month, Rajan Wadhera, President, SIAM, said, "The month of March 2020 was one of the most challenging months for the Auto sector as the 21-day lockdown resulted in bringing the production and sales of vehicles to a standstill in the last week. As the revenues took a severe hit, the OEMs struggled to meet fixed costs and working capital requirements.

The Auto Industry is engaged in a dialogue with the Government of India on policy measures which could minimize the impact of COVID on the Indian economy and especially the Indian Automobile Industry. There would be challenges on the supply side; demand-side and also on the issue of availability of Finance which would all need to be addressed to bring back growth in the sector.

FY'21 sales to decline 8-10%

Rating agency ICRA continues to maintain a Negative outlook for the commercial vehicle (CV) segment over the near-term, given the slowing economic growth, current overcapacity in the CV ecosystem and not so benign financing environment, with challenges further aggravated by the recent and rapid spread of novel coronavirus in India. 

The demand headwinds are expected to continue over the near-term given the macroeconomic challenges in view of the recent pandemic outbreak coupled with weakening financial profile of fleet operators and significant price hikes because of transition to BS6 emission norms. This would exert pressure on earnings and overall credit profile of CV OEMs, which have witnessed sharp earnings contraction over the past 3-4 quarters.

Despite the rural demand sentiment witnessing an uptick in recent months, supported by expectations of a healthy rabi output, ICRA expects the outbreak of novel coronavirus and the associated lockdown and restricted movement of goods to have a bearing on the segment over the near term. Accordingly, despite recovery expectations during the latter half, the LCV (Truck) segment is expected to contract further by 7-9% during FY2021e. Furthermore, prolonged disruptions due to recent coronavirus outbreak poses further downside risks to this.

The sharp volume contraction and resultant negative operating leverage coupled with elevated level of discounts exerted significant pressure on earnings and credit metrics of CV OEMs during the current fiscal. These pressures are expected to continue at least over the next couple of quarters, before recovery sets in the industry. Furthermore, any unsold BS4 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.

PRODUCTION

March 2020 was the last month for BS4 production for the Indian automakers, and the industry now drives into BS6 emission regime. Considering the shift, OEMs have cut-down production in the last two months to rationalize the BS4 production and started making BS6 vehicles. But plant shutdown due to nation-wide lockdown disrupted everything.

The overall CV production in the month plunged 83% to just 18,057 units. (March 2020: 105,475 units).  The production numbers of all the major truck makers hit rock bottom in March. Tata Motors produced a total of 4,663 units down by 90%, Mahindra & Mahindra 7,404 units (-72%), Ashok Leyland 1,166 units (-94%) and VE Commercial Vehicles 1,725 (-77%).

The M&HCV goods carrier segment production declined by 91% to 3,166 units and the passenger vehicle segment by 76% to 1,385 units. The LCVs passenger and goods carrier dropped by 75% and 79% respectively to 1,538 units and 11,968 units. 

DOMESTIC SALE

The domestic commercial vehicle sales in March turned out to be a complete catastrophe for the industry. In the first 25 days, OEMs were cautious with limited BS4 stock at the factories, as they stopped production in a few weeks in advance with a close eye on inventory.

This strategic planning by OEMs left them with almost zero stock at the factories and a limited number of vehicles at the retail distribution. This was in anticipation of marginal pre-buying towards the end of March, as this was the absolute last minute's opportunity for the customer to buy a BS4 vehicle, slightly cheaper than the new BS6 truck. What is also typical with the truck industry is the bulk of the sale happens in the last week of any given month.

Having learned the lesson of the inventory problem and subsequent losses during BS4 implementation, OEMs were comfortable with the stock level and geared up for BS6 production. Precisely at this point, the sudden lockdown due to deadly COVID-19 interrupted everything with abrupt plants shutdown to ensure the safety of workers and employees. This was an unavoidable decision-which not only stopped the production but halted sales and registration of BS4 vehicles completely. 

As a result, the overall CV market dropped to its historical low in March'20, and the numbers aren't comparable to any month. The industry barely sold 13,277 units in the month a drop of massive 88%, and this has reflected across all the major segments of the industry. The heavy-duty truck segment registered a sale of 3,993 units (-89), and the passenger carrier segment sold 1,652 units (-70%). The LCV passenger and goods carrier segments recorded sales of 2,070 units and 5,312 units in the month down by 74% and 91%, respectively. ​​           

It was a brutal month for the vehicle makers as the massive drop means they have a bleak future and tough few months. Tata Motors sold 5,298 units in the month (-89%), Mahindra & Mahindra’s total in of 2,321 units (-90%), Ashok Leyland’s sales declined to 1,773 units (-91%), VE Commercial Vehicles recorded 1,409 units (-81%).

EXPORT

The exports of commercial vehicles dropped by 65% in the month to 3,625 units. Market leader Tata Motors exported a total of 1,769 units in the month (-68%), M&M shipped just 306 units (-86%), Ashok Leyland exports in the month stand 392 units (-61%), VECV-67 units (-95%), and SML Isuzu exported 61 units (-52%)

CONCLUSION 

Commercial vehicle sales are directly linked with the underline economic activities in the country. In FY'20, the industry has been under severe pain with all the key indicators of growth in the decline. The transition to BS6 was the most significant challenge faced by the industry this decade. Yet, the industry prepared to the most stringent emission norms in record time, both in technology and manufacturing. India today is part of a handful of countries globally with the vehicle running on the cleanest fuel on the planet.

However, the COVID-19 crisis changed everything and now the focus on the pandemic. This will limit the government's push towards broader economic and infrastructure push in the mid-term, which help the CV sector to grow.  Thus, full recovery will take a while; despite this, the partial revival ought to start in the next 1-2 quarters once the economy starts to open up.  

Nevertheless, India is the fastest-growing large economies in the world, rising consumption and promising prosperity among masses likely to keep the long-to medium turn potential of the country intact, and commercial vehicle would be an integral part of this growth story, with few bumps along the way. However, the CV and transport sector braces itself for a tough ride ahead.

Also Read: Analysis: Three-wheeler industry performance in FY’20