Backed by a robust March quarter, truck makers such as Tata Motors Ltd and Ashok Leyland Ltd have met sales forecasts for fiscal 2011 (FY11). Although it’s hard to establish a trend, given the erratic growth performance in the last few months, headwinds led by inflationary pressures spell caution in growth rates for the current fiscal.
For the March quarter, Ashok Leyland’s sales of trucks and buses grew 15% year-on-year. Its efforts to increase its pan-India presence have added to numbers. Sales in FY11 grew at a strong 37% in the segment. Competitor and market leader Tata Motors, which produces about twice the number of vehicles in the segment as Ashok Leyland, registered a sales growth of about 10% for the quarter and 27% for the full year.
Of course, fourth quarter buoyancy is a given for commercial vehicles as large fleet operators often buy new vehicles to gain depreciation benefits for the year. Dealers say that firms also invoice higher numbers to bring down inventories and push up sales.
But a shift in market dynamics during the second half of FY11 has led to erratic volume patterns. Pre-buying before the new emission norms were enforced in October saw an unusual jump in sales during September, in anticipation of an increase in the prices of new models. Also, vendor constraints affected sales in the third quarter for some firms, which were made up in the fourth quarter.
The key factor driving sales volume was the quick domestic economic rebound since October 2009, which translated into higher goods movement and rise in truck rentals. Of course, the cost of truck ownership and operations also rose by way of higher interest rates, diesel prices and driver salaries.
But, says S.P. Singh, senior research fellow and convenor, Indian Foundation of Transport Research and Training (IFTRT), “Growth in truck rentals outpaced the rise in costs, which in turn motivated fleet replacement.” For example, IFTRT data indicates a 17-20% jump in truck rentals compared with a 12% rise in costs during fiscal 2011.
Low resistance to rising rentals until now has motivated fleet owners to add vehicles. Further, logistics service providers, who outsourced or leased trucks from owners, are finding it more profitable and reliable to own vehicles.
The party may go on for a couple of quarters before it bucks the robust trend. Indications of high agricultural output, be it wheat or pulses, are already spreading optimism among fleet operators for the first quarter of FY12. Further, manufacturers such as Ashok Leyland are hoping to double vehicle exports to 25% of sales in three years.
Despite this optimism, historic auto cycles are testimony to the fact that there will be an inflection point when growth rates sober. In fact, the fragmented nature of the freight and logistics sectors makes it difficult to track capacity addition among fleet operators. Rising costs are expected to catch up in the medium term, as there could be resistance to the unabated rise in rentals.
While equity market analysts are certain that operating leverage may offset cost pressures for the March quarter, they believe that a higher base effect would tone down growth in FY12 to around 15% over FY11, when the average growth rate of the truck and bus segment scaled a peak of 32%.