Commercial vehicles defy slowdown

Paradoxically, commercial vehicle (CV) sales have belied expectations of a slowdown in spite of weak Index of Industrial Production (IIP) numbers, month after month. Typically, CV sales display a strong correlation to IIP, which mirrors the state of economic activity in the country. But it’s different this time around.

Growth in industrial activity has slowed to 5% during the first six months of fiscal 2012 as against 8.2% during the year-ago period. But the Indian Foundation of Transport Research and Training (IFTRT), in its monthly analysis, said sales growth was 23% in November for light commercial vehicles (LCVs), intermediate commercial vehicles (ICVs) and multi-axle vehicles.

Although there are jitters about a slowdown in the sector, so far LCVs have been leading the run-up in sales. Market leader Tata Motors​ Ltd clocked a 25% year-on-year (y-o-y) rise in CV sales in November, mainly driven by a 38% increase in LCV sales. The company has a 58% share of the LCV market, even as other companies such as Force Motors Ltd​ and Eicher Motors Ltd are registering strong growth and late entrants such as Mahindra and Mahindra Ltd and Ashok Leyland​ Ltd are also faring well.

According to Umesh Karne, analyst, Brics Securities Ltd, “Buoyancy in the sector is due to demand from the organized retail sector, higher demand in consumer durables, construction in urban areas and replacement demand.” Higher replacement is due to insistence from large customers to provide a younger fleet. Meanwhile, better lifestyle in rural and semi-urban areas, along with a higher movement of agri-commodities, has also led to fleet expansion.
Of course, moderation in truck sales is visible. For November, Tata Motors’ truck sales rose a mere 7% from a year ago, compared with double-digit growth registered during October. Ashok Leyland, which has a strong southern presence in trucks, also posted 53% sales growth for November, albeit on a low base. A report by Edelweiss Securities Ltd hints at a lower single-digit increase in trucks from December.
The IFTRT note on monthly sales says that part of the sustained sales momentum is due to high discounts offered by manufacturers, who had raised prices steeply over the last eight quarters. Analysts estimate growth of about 9% in trucks and a robust 16-17% in LCVs for fiscal 2012. Still, market leader Tata Motors’ stock has underperformed the benchmark indices since the June quarter, perhaps due to its exposure to the passenger vehicles segment, which has been hit by a slowdown.
The outlook for CVs as a whole seems to be clearing up, with the interest rate cycle peaking and raw material costs expected to recede. The only grey area is profit margins, which would adversely affect earnings growth and in turn valuations.