Rail freight corridors may undermine truck sales
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The dedicated freight corridor (DFC) project is the cornerstone of Indian Railways’ plan to decongest its network. In the first phase, the railways aims to complete two corridors—Western DFC (Uttar Pradesh to Mumbai) and Eastern DFC (West Bengal to Punjab)—by December 2019, with commissioning (in segments) beginning from 2017-18.
“These will create huge capacity for carrying freight traffic between Delhi-Mumbai and Delhi-Kolkata,” railway minister Suresh Prabhu said in his budget speech. In two years from 2019, traffic in these two corridors itself is estimated to reach 305 million tonnes (mt), more than one-fourth of what the railways is estimated to carry in the current fiscal year.
Further, as the railways fast-tracks the execution of three more corridors—Delhi-Chennai, Kharagpur-Mumbai and Kharagpur-Vijayawada—more freight capacity is expected to hit the market. The railways expects these new capacities, along with freight basket expansion and rationalization of tariff structure, to help it regain market share in freight traffic.
While the results of this strategy will be known only in the coming years, it can have unintended consequences for the commercial vehicles industry.
As new capacities come on stream and a portion of long-haul road traffic moves to DFCs, the requirement for new medium and heavy commercial vehicles (MHCV) can fall, Nomura Research warns. “Assuming a gradual ramp up in (DFC) utilization, we believe this could impact new truck demand by ~7-20% in FY19-20,” Nomura said in a note. “Thus, new MHCV sales could come under pressure over FY19-20, before normalizing from FY21 onwards.”
The broking firm estimates Ashok Leyland Ltd’s revenue to take a hit of 4-12% in 2018-19 and 2019-20. Ashok Leyland derives more than half of its revenues from truck sales.
That said, all is not lost for truck makers. According to Nitesh Sharma, an analyst at PhillipCapital (India) Pvt. Ltd, as the hub and spoke model evolves, fleet operators will move to larger tonnage vehicles to maintain their competitive position. Large trucks offer better economies of scale. Sharma expects the demand for 40-50 tonne trucks to rise in the coming years. Currently, most of the truck sales are in the 10-30 tonne range. While this should cushion the impact for truck manufacturers, it has to be seen how the industry responds to the challenge posed by large DFC capacity additions.