ICRA expects the M&HCV (Trucks) industry to grow by 19-21 % in FY16 owing to improving viability for fleet operators, replacement-led demand (following two years of capacity deferral by fleet operators). Gradual improvements in these factors, including pre-buying ahead of implementation of BS-IV emission norms and Anti-Lock Braking Systems (ABS), have reflected in 35.1% growth in M&HCV (Truck) segment in H1FY2016.
ICRA’s channel check with a wide spectrum of fleet operators suggests that although demand for road logistics hasn’t improved meaningfully over the past few quarters, the reduction in diesel prices has come as a relief for the industry, which was reeling under pressure of steadily rising operating costs and weak bargaining power (amidst surplus capacity in the trucking system). The improvement in cash flows of fleet operators has also started showing up in improved collection efficiency for CV financiers, who expect that further deterioration in asset quality indicators is unlikely.
However, structural challenges still persist in LCV (Truck) segment. Unlike M&HCVs, we expect the LCV (Truck) segment would continue to face challenges (expected to decline by 8-10%) in FY 2016 as segment’s prospects continue to be influenced by overcapacity issues and constrained financing environment amidst rising delinquencies. Nevertheless, the segment’s growth prospects over the medium-term remain intact. Some of the factors that are likely to support steady demand for LCVs going forward include a) further proliferation of “Hub-n-Spoke” logistics model with the implementation of GST, b) relatively untapped potential in semi-urban and rural areas and c) improving urbanization levels. Moreover, the emergence of SCVs has also been a source of attractive employment opportunities for first time buyers (FTBs), which along with an established financing market will also support demand for LCVs. Accordingly; we expect demand for LCVs will grow at CAGR (%) 11-13% over the longer-term.
Across OEMs, the EBITDA margins have improved anywhere between 400-600 bps during the current fiscal year. ICRA expects further margin expansion driven by improving operating leverage (i.e. higher sales), lower raw material prices and some discipline among OEMs with regards to discounting strategies. In addition, growing exports and an increasing trend towards factory built vehicles (FBVs) following the implementation of uniform bus body norms will also support margin expansion. While OEMs have been implementing cost rationalization plans, there will be some cost pressures, especially related to manpower cost and likely increase in expenses related to new model launches
ICRA expects credit profile of CV OEMs to remain stable over the medium term on back of higher internal cash flow generation and relatively limited capital expenditure requirements.