The CV industry has garnered a lot of attention lately. The industry has performed well in the past few months. We analyse the performance of the industry in detail to understand whether this is a short-term aberration or the path to a long-term sustainable growth. We review the CV industry performance and also look into the performance of truck operators this year. We will also highlight the major trends observed this year and finally summarise what can be expected from the industry in the coming year.
1. CV industry performance this year
Consistent growth month on month and a resilient performance despite the challenges thrown up by Omicron have helped the CV industry stage a comeback. The following is a close analysis of the performance of the industry this year.
a) The second-best performer: The CV industry was the second-best only to passenger cars growing at 30% in FY21 whereas, it fell slightly shy of the volumes in FY20, down 18%. The 3-wheeler industry continues to be the most affected segment during the pandemic followed by the 2-wheeler industry which continues to grapple with low rural demand (including demand for entry level vehicles).
b) Growth in all truck segments: The growth in the CV industry was well distributed across Small Commercial Vehicles (SCVs), the Intermediate & Light Commercial Vehicles (I&LCV) and the Medium & Heavy Commercial Vehicles (M&HCV). I&LCV volumes have almost rebounded to the pre-Covid levels and they are closely followed by the M&HCV segment. The SCV segment was impacted for a few months earlier in the year due to semi-conductor short supplies and is expected to rebound in the last 2 months of the year. While the passenger segment posted a growth against last year, it continued to lag significantly behind volumes in the pre-Covid period.
c. The top 5 manufacturers perform well: All major manufacturers have seen growth against last year. The market leaders Tata Motors, Ashok Leyland and VECV have all seen strong growth in volumes against last year. Maruti also continued to impress, growing its volumes over the past 2 years despite the pandemic.
However, Mahindra’s volumes were impacted by a shortage in supply of semiconductors that were sorely needed for its SCV range of vehicles. This impacted its supply between August and December. We expect Mahindra volumes to grow significantly in the last 2 months of the year since shortages have now been addressed.
2. Truck Operator profitability
The sales of CVs are dependent on the profitability of truck operators and the utilisation of the existing trucks in the market. Operator profitability in turn depends on the prevailing freight rates and diesel prices (since diesel still accounts for over 40%-60% of operating expenses).
In order to better understand the market demand, we have used a couple of leading indicators, Fastag Collection and E-way bills. They offer a strong insight into the overall utilisation of trucks in the market. These indicators in conjunction with freight rates and diesel prices give a better understanding about the viability of the operators.
a. Fastag collection grows by 82% YOY: Commercial Vehicles contribute to a vast majority of toll collected at toll booths across India (A random check across toll booths indicated that they account for nearly 70% to 90% of collection). Collection has grown by 82% and we have also seen consistent growth month on month until December this year. It is also clearly visible that the impact of Wave 2 of the pandemic was much less than that of Wave 1. This clearly indicates that there has been a strong upswing in freight movement this year.
b. 31% more E-way bills issued this year: E-way bills have grown by 31% to INR 63 crores from 48 crores last year. Freight volumes have also been more consistent this year. A brief look at E-way bills issued in the July to December period indicates they crossed 6 crore bills every month in that period this year vs. only in 2 months in the same period last year. This clearly indicates that freight movement appears to have stabilised this year.
c. Consistently high truck utilisation levels: Truck utilisation has stayed strong and has remained consistent month after month this year. Truck operators benefited from the growth in the economy and the recovery of goods movement post Wave 2 of the pandemic. Since July, utilisation levels have remained consistently over 74%, barring November, where it dropped to 70% post the holiday season. Utilisation levels have continued to remain better than last year, including the peak months of December and January this year.
d. Rising freight rates vs. flat diesel prices: Until wave 2 of the pandemic, diesel price hikes had consistently outgrown freight rate increases which had lagged behind. However, since May, freight rate growth has outpaced Diesel prices. This has been a major relief for truck operators bringing in some much-needed relief post 2 waves of the pandemic. However, we also anticipate that once diesel prices rise again post the elections, freight rates will once again lag behind diesel price hikes.
e. The profitable operator: As the economy continues to go from strength-to-strength post pandemic, the financial health of the operators is improving. More goods movement has led to higher utilisation of trucks, which in turn has helped improve freight rates. This has led to better income for operators this year.
Operators have also received temporary relief from flat diesel prices thanks to government policy during the elections. However, other expenses continue to rise. The cost of BS6 trucks have increased by over 25% to 40% over similar BS4 trucks, leading to higher EMIs. Driver shortages have led to increased driver salaries. Tyre and Lubricant costs have also increased significantly over the past few months with rising fuel prices. This has led to a significant increase in the overall cost of operations for Operators.
Despite these challenges, the overall financial health of the operators has improved significantly. Financiers that we have recently talked to have indicated that repossession of trucks is now back to pre-pandemic levels. All this bodes well for healthier fundamentals which is good for a brighter future for the CV industry.
3. Highlights of the year 2021-22
a. A story of 3 quarters: CV sales broken by quarter is revealing. Wave 2 of the pandemic had a significant impact on Q1 sales (even though they were significantly better than the year before). However, sales in both Q2 and Q3 matched the pre-pandemic sales. This indicates that the industry is well on its way to reaching pre-pandemic sales in a consistent manner.
b. Selective sectoral growth: A few major sectors within the CV industry have seen disproportionate growth this year. E-commerce has made significant inroads during the pandemic and this has benefited operators specialising in E-commerce and those in the parcel / courier segment. Similarly, operators in FMCG, CNG cascade transportation and Infrastructure contractors have also seen strong growth. While most other segments have seen improved utilisation this year vs. last, they are yet to see pre-pandemic utilisation. Growth has also accelerated in urban India while rural India continues to lag slightly behind. Geographically, the growth has been led by the states in the North and West followed by the South and Central states. At the same time, the East continues to lag behind.
c. Missing the bus: Passenger bus transportation continues to be the worst hit in the commercial vehicle segment. All sub-segments including School, Staff, Tourist, Night Service and Route permit operations continued to remain idle for most of the year. The only bright spot was Staff transportation for Manufacturing units which has come back strongly with the ‘Atmanirbhar Bharath’ initiative.
d. CNG variants flexing their muscle: CNG is slowly transitioning to become a variant of choice in commercial vehicles. Among its many advantages, two stand out. It is cheaper than diesel (partly due to subsidies). And it is a green fuel (with lower CO2 emissions). At the same time, the Government’s push to increase the number of CNG dispensing stations has made this transition quick and efficient. In Q2 and Q3, CNG was the preferred variant across the SCV & I LCV range of trucks. Market leader Tata Motors recently shared that 44% of its sales in I&LCV and 33% in SCV came from CNG until January 2022. Other manufacturers indicated similar numbers. While Ashok Leyland missed out on this opportunity last year, it has recently showcased a range of trucks that are now CNG ready to take advantage of growth opportunities in the coming year.
e. Used truck prices break new ground: Prices of fast-moving models of used trucks have risen between 15% and 30% over the past few months. A combination of high prices for new BS6 trucks, high truck utilisation and rising demand for used trucks have helped increase their resale value.
4. What to expect next year?
a. Geopolitical situation: The ongoing conflict between Russia and Ukraine will have an impact on the global economy. A long-drawn conflict also creates high levels of uncertainty globally. Russia is also a major producer of crude which will in turn impact diesel prices significantly. While the impact on the Indian economy may be small, it may pose a challenge to our anticipated rate of growth, which may impact the sales of CVs.
b. Sustained growth momentum: The fundamentals point to the beginnings of a strong recovery in the CV industry. Demand for moving goods is keeping utilisation of trucks high and freight rates stable. Operators are currently profitable and the demand for new trucks is rising. As the economy grows at pre-Covid levels starting next year, the CV industry should see sustained growth. CRISIL has recently shared that they expect the CV industry to grow between 18% and 23% in the coming year.
c. Low impact disruptions: All industries have been affected by disruptions, some more than others. The CV industry will expect low levels of disruptions to operations in the coming year due to Covid. Consistent policies for containment both at the central level and at the state level will limit disruptions in the market and give industry the leeway for continued growth.
d. Rising diesel prices: The ongoing conflict between Russia and Ukraine has added to the strain of already high crude oil prices. Even prior to the conflict, Goldman Sachs had expected crude prices to stay elevated this year and next with oil breaching the USD100/barrel mark by Q2 2022. The conflict has already elevated prices beyond USD100 well in advance of Goldman’s predictions. Elevated prices will in turn translate to higher freight rates. While these will be passed on to end consumers, as the cost of goods rise, volumes will be under pressure once again causing challenges in utilisation. Since diesel prices are currently subsidised for the ongoing Assembly elections, we anticipate a significant double digit price increase in diesel prices very soon.
e. More sectors joining the party: As the economy continues to grow, more segments will see improved prospects for growth. Tippers, transit mixers, cement and steel transportation will all benefit from the Government’s infrastructure push. Rural India will also benefit from schemes announced in the budget and a strong monsoon. All these factors point to a more broad-based recovery across multiple sectors in the next year.
f. Time to replace older trucks: Most operators have limited the purchase of trucks for new contracts with only a few replacing their older fleet. Replacement has taken a back seat due to worries around disruption due to the pandemic. In the coming year, we anticipate that more operators will go in for replacement and modernisation of their existing fleet.
g. Getting back on the bus: As we learn to live with the pandemic, we anticipate that children will be allowed to go to school on a regular basis next year. This will be a trigger for all offices to be re-opened in a hybrid or full-time format including IT & ITES which will bring the existing fleet of buses back in service. This will also be a trigger point for replacement of old buses and for addition of new buses to the existing fleet.
h. CNG as a variant of choice: Until Q2 2022, CNG vehicles were primarily sold in the NCR region. However, with the rising Diesel prices and a growing network of filling stations, CNG became a popular option among CV buyers. We anticipate this trend to continue and if diesel prices stay high, CNG variants will soon overtake diesel variants in sales.
i. Innovative new products: All OEMs are currently working on a portfolio of new products. Minister for MoRTH, Nitin Gadkari has tasked OEMs with developing flex fuel engines which can run on petrol, ethanol or their blends. OEMs are also in the process of developing CNG engines that can work with M&HCV trucks. We also anticipate the introduction of EVs in the SCV segment in the near future. All major CV manufacturers have made some of the largest commitments to investment in the recently concluded Automotive PLI floated by the Indian Government.
j. Risk of not charting India’s fuel pathway: It is important for the Union Government to chart out a fuel pathway to the future. This is critical for OEMs to understand where to invest their R&D to maximise their returns for the future. While a good portion of CNG is extracted domestically, India continues to import a large portion of its requirements and global prices for the same have been increasing. At the same time, the government is also encouraging OEMs to focus on flex fuel engines, EVs and LNG. If the Government delays charting out a clear pathway, this will give rise to large risks in deploying capital which may lead to OEMs losing their edge to startups that invest capital in niche technology.
k. Anticipating the next supply chain disruption: OEMs have to deal with the growing volumes, changing policy and rising diesel prices and input costs. The global semiconductor crisis impacted the supply of Mahindra SCVs this year. Similarly, the industry also faced a shortage in the supply of components used for CNG vehicles due to the sudden increase in demand. As CVs become more sophisticated and the number of component suppliers continues to shrink, the next shortage may not come from semiconductors or CNG components but elsewhere. The OEMs best prepared to plan for the next supply chain disruption will have an edge in sales.
In summary, we believe that the CV industry is on the verge of a breakout year of sustainable recovery next year. The fundamentals remain strong and the operators, OEMs and financiers stand by looking forward to taking advantage of the growth opportunities.
(The author, Kaushik Narayan is the CEO of Leaptrucks, the largest platform for used trucks in India. He is a contributor to ETAuto.)