Future of CV sector bleak after COVID-19 pandemic, according to ICRA

Ratings agency ICRA has said that the commercial vehicle industry in India is moving towards adverse tough times, stating that CV sales are expected to contract further between 8-10 percent in 2020-2021, due to the COVID-19 crisis being a key factor in the decline.

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In a statement, ICRA said, “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 BS-VI emission norms.”.

The agency maintains that the COVID-19 crisis has added on to the troubles being faced by the industry already, including the slowed economic growth, current overcapacity in the commercial vehicle segment and other financial aspects. The report by the agency highlights that these factors will lead to a crushing load on the OEMs in the industry in terms of their earnings, which has been seeing a decline for the past few quarters.

Shamsher Dewan, Vice President, ICRA, notes, โ€œIn particular, the M&HCV (Truck) segment has been significantly impacted over the past year, with volumes contracting by a sharp 42 percent in YTD FY2020. Excess capacity created in the system post revision of axle load norms in July 2018 and faster turnaround of vehicle post GST implementation, coupled with slowdown in the economy and infrastructure projects and the resultant lower freight availability continue to weigh on the demand prospects.”.

He further said 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.

He further said, “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. 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 percent during FY2021 expected.”.

In particular, the FY-2020 did not bring any good news for the Light Commercial Vehicle (LCV) segment, due to a decline witnessed in demand and consumption. In total, a contraction of 13 percent was witnessed in the volume of LCVs dispatched, owing to constricted demand from the rural sectors, and inventory correction by OEMs.

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.

Deewan added, โ€œWith cash flows of fleet operators under pressure due to aforementioned factors, replacement demand for new trucks is likely to remain muted till any meaningful pick-up in the economy and infrastructure projects fructify. Additionally, the recent pandemic outbreak remains a significant unknown which can have a bearing on the economy and CV sales over the near to medium term. ICRA believes an improvement in the 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.”.

ICRA has dictated that the CV OEMs should expect further hits to their earnings in the next few quarters to come, in light of the decline in demand and volume contraction. Moreover, unsold BS-IV inventory also poses a threat to the profitability for CV OEMs. The industry forecast seems bleak, as normalcy is not expected to be established anytime soon.

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