Domestic CV industry volumes likely to contract by 25-28% in FY21: ICRA

31 Jul 2020 Evaluate

Maintaining a negative outlook on the domestic commercial vehicle (CV) industry over the near-term, ratings agency ICRA in its latest report has said that the industry volumes may contract by 25-28% in current fiscal year (FY21). The contraction will bring industry volumes to lowest levels in more than a decade. It said although growth would be optically better in FY22 at 24-27%, recovery to industry volumes of even FY17 levels would remain some time away. It maintains negative outlook on the industry with headwinds continuing from all fronts, be it financing availability, macroeconomic environment, regulatory developments or fleet operator health. The situation has been further aggravated by the rapid spread of novel coronavirus in India.

The agency said demand headwinds are expected to continue over the near-term, given the macroeconomic challenges in view of the pandemic outbreak, coupled with weakening financial profile of fleet operators and significant price hikes because of transition to BS-VI emission norms. Additionally, the lockdowns imposed in the country from end of March 2020 have added production constraints to the on-going set of challenges. It said the only limited green shoot visible is the uptick in rural demand, which augurs well for light CVs segment, although ability to recoup lost sales of Q1 FY21 remains to be seen.

Overall, these headwinds are expected to exert pressure on earnings and credit profile of CV original equipment manufacturers (OEMs), which have witnessed sharp earnings contraction over the past 4-5 quarters. In particular, the medium and heavy CV (truck) segment would continue to face significant demand contraction in FY21. The challenges related to freight availability and stress on fleet operators have compounded significantly over the past 3-4 months on account of the pandemic outbreak and lockdown imposed to curtail it. ICRA added that recovery over the medium-term hinges on macroeconomic revival, as well as pick-up in construction and mining activity. Moreover, replacement demand for new trucks and buses is likely to remain muted over the near-term, given the pressure on cash flows of fleet operators.

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