Future Outlook of Commercial Vehicle (CV) sector2 min read
Why did the Commercial vehicle (CV) segment displayed subdued profitability in past? How are the future prospects of CV segment?
Auto Industry (Commercial Vehicle) Outlook
Demand outlook for Commercial Vehicle industry is improving with a sharp recovery in economic activities post lock-down, increasing fleet utilization levels, strong rural demand. Truck replacement demand is expected to remain afloat with improved utilization higher than 70%. Tata Motors and Ashok Leyland, which are dominant players in commercial vehicles segment are expected to benefit from the strong demand momentum.
Commercial Vehicles Future Outlook
Profitability of Fleet Operators remained subdued since last 3 years
Key reasons for this subdued profitability are :
- Subdued Freight Rates amid Economic slowdown & dampened economic activities.
- Overall due to slew of events in the last couple of years like demonetization, GST implementation, COVID-19 pandemic, etc impacted the GDP growth of India, which indirectly affected the commercial vehicle sector.
- Higher Interest Rates (accompanied with delayed Monetary Transmission in FY20).
- Although, RBI undertook rate cuts, actual benefits of these rate cuts took time to seep into the economy due to delay in transmission of these low interest rates by financial institutions like banks and NBFCs.
- Also the NBFC crisis like IL&FS issue added to the issue of difficulty in financing.
- Decline in Overall Utilization of Trucks (Low Fleet Utilization)
- A Fleet Operator makes profit at the truck utilization of >70% (assuming stable interest rates & fuel prices).
- In FY16, fleet operators were earning a profit of ~ INR 4.4 lakh per truck barring the financing costs like EMI,etc. As opposed to this, in FY20, fleet operators profitability tanked and they incurred losses to the tune of INR 26,000 per truck.
Market Share (%)
Medium & Heavy Commercial Vehicle (MHCV) Segment
- As we an see here, Tata Motors has largest market share of 50% followed by Ashok Leyland , Eicher Motors and others.
Overall Commercial Vehicles (CV) Segment
- Tata Motors dominates the market share in Commercial vehicle segment as well, followed by M&M and Ashok Leyland.
Improving outlook for commercial vehicles
- Sharp Recovery in Economic Activity post lock-down and revival of Mining & Construction activities.
- Fleet operators have turned profitable as of November 2020 led by increase in truck utilization rates (improving Fleet utilization levels).
- At utilization rate > 70%, truck replacement demand is expected to remain afloat.
- Also, higher rural demand on the back of improved rural income creating favorable outlook for Commercial Vehicles (CV).