New Delhi: Ashok Leyland Ltd, India’s second largest seller of trucks, is putting off by two years the opening of a planned facility that would have increased its production capacity by at least 50%. The move comes on the back of rising interest rates, which have reduced demand for commercial vehicles in the current financial year.
One economist said the decline in demand for trucks did not bode well for the economy. “Slowdown in commercial vehicle sales is a clear signal of a forthcoming slowdown (in the economy),” said Suresh Babu, assistant professor of economics at the Indian Institute of Technology (IIT), Chennai.
Worrying signs? Ashok Leyland managing director R. Seshasayee. (Photo: Ramesh Pathania/Mint)
The Chennai-based Ashok Leyland had originally planned to add 100,000 units to its existing capacity of 84,000 units by the first half of 2010. This increase was to be across two locations—Chennai and Uttarakhand. Now, the company says it will only go ahead with the plan at Uttarakhand, but keep the 50,000-unit expansion in Chenani for 2012.
Interest rates in India are at a five-year high and most vehicle purchases in India are financed by borrowings.
“The market growth is not commensurate to the capacity build up...(but) we can’t be wrong for long,” said R. Seshasayee, managing director of Ashok Leyland, referring to the fact that the company expects the demand it originally projected to come about, but later.
“Typically, the investment cycle is between 18 and 24 months. The good news is that the way India is growing, you could be wrong for a period of six months to one year. You can’t be wrong for more,” Seshasayee added.
Sales of medium and heavy commercial vehicles fell by 3.98% in April-December 2007, the first decline in six years, after posting a compounded annual growth rate of 28% over the five-year period up to March 2007, as per numbers released by the Society of Indian Automobile Manufacturers (Siam). The fall came even as the economy grew at 9% a quarter in the four quarters to December.
Economists see sales of commercial vehicles as a lead indicator of the economy’s performance. Goods in India are mostly moved by road, and the volume of goods moved is directly related to the performance of the economy. In November, overall industrial production grew by 5.3%, a 13-month low, as the cost of doing business rose under the impact of nine interest rate hikes since 2004 and other measures by the country’s central bank including an increase in the balance banks need to keep with it in an attempt to reduce lending.
If investment in manufacturing were really strong, that would mean some extra capacity coming on stream gradually, said Robert Prior-Wandesforde, India economist at HSBC global economics research. “So far, it (capacity addition) is proving to be a slow process,” he added.
The slowdown has happened over a period of time, said T.T. Srinivasaraghavan, managing director of Sundaram Finance Ltd, a leading financier of trucks. “Until two years ago, cheap money was driving (purchases). Hence, truckers bought (more trucks). With better roads, service has become faster and as a result overcapacity has been gradually built up. The replacement of commercial vehicles has slowed down, because of less wear and tear. You aggregate the above and you have overcapacity staring you in the face,” he added.
While that may be the case, truck buyers say they haven’t been wooed enough by truck makers who raised the prices of trucks last year as costs of raw material such as steel and rubber rose.
“There has been little done by manufacturers to mitigate rising input costs through better vehicles or promotions,” said Vineet Agarwal, executive director of Transport Corp. of India, a logistics company.
Indeed, car sales in India have held up despite higher interest rates on car loans because car makers have resorted to promotions ranging from steep discounts and free holidays to free accessories and lower interest rates in order to boost sales. And the launch of several new models has also helped stoke interest in car buying.
However, not everyone is convinced that India’s industrial growth is tapering.
Dharmakirti Joshi, principal economist with rating agency Crisil, does not think a cyclical downturn or slowdown is around the corner. “Slowing growth in some segments may lead to wait-and-watch by some firms as far as investments are concerned. But data thus far does not indicate a slowdown in investments,” Joshi said.
According to a senior analyst in Fitch Ratings who asked not to be identified because he is not authorized to speak to the media, investment spending is continuing, though the slowing of overall industrial production and growth this year is certain.
His optimism is based on the fact that capital goods output, which is a good proxy of investment spending, actually strengthened in November, exceeding 24%.
“To the extent that these extra capital goods are being used to alleviate the all too obvious bottlenecks in the country, it should bode well for India’s longer-term growth potential,” said Prior-Wandesforde.
Ravi Krishnan contributed to this story.