Drop in truck sales a reason for worry
Not only does the decline weigh down on investor sentiment towards this segment—which was the first to turn around in the auto sector—it also raises questions on the strength of the economic recovery
The August sales numbers of leading commercial vehicle manufacturers are worrisome.
Not only does it weigh down on investor sentiment towards this segment—which was the first to turn around in the auto sector—it also raises questions on the strength of the economic recovery.
Market leader Tata Motors Ltd reported a shocking 17% year-on-year drop in the domestic sales of medium and heavy commercial vehicles (M&HCVs) during August.
It was also lower, compared with sales in July.
Ashok Leyland Ltd, the second largest truck and bus maker, reported a 7.9% drop in sales in overall M&HCV sales, too.
This is not sudden.
Tata Motors’ sales hit a roadblock in May. It has not recovered since. Sales of Ashok Leyland have been sliding, too. One could argue that the segment clocked heady growth for nearly two years before falling and, hence, the high base has challenged growth prospects.
If M&HCV and auto sales reflect the state of economy, then it questions the sustainability of “green shoots” of economic recovery, too.
Further, although manufacturing in select sectors that back consumption has picked up, it has not enthused investment demand and capital expenditure.
Further, heavy industries such as construction and mining are still limping.
India Ratings adds that the robust growth in M&HCV sales in FY15 and FY16 was perhaps pent-up demand.
Meanwhile, truck rentals have also fallen in the past few months.
One could blame this on the cut in diesel prices in the recent past and a heavy monsoon that may have disrupted the movement of goods.
However, a note by Reliance Securities on the sales numbers for August says that replacement demand, which was robust a few quarters ago after the long lull in truck sales, has tapered off.
Meanwhile, the inadequate rise in freight rates and a slow pick-up in construction activity, along with a high FY16 base, has kept truck sales subdued.
Growth in light commercial vehicle sales, though rising, has also moderated.
Fleet operators appear to have another concern, too. The new goods and services tax (GST), when introduced, will no doubt reduce logistics hurdles and reduce time at check posts, thereby improving fleet productivity, too.
So, perhaps operators may not feel the need to expand until GST comes into existence.
A Tata Motors presentation highlighting its June quarter performance says growth in the freight rate index shows a decelerating trend since the December quarter of FY15 on the back of weak economic activity.
This may weigh down on truck sales, unless there is a post-monsoon revival in economic activity.
For now, one hopes that it is a seasonal blip.
All eyes are, therefore, on the second half of FY17, which should set the pace of growth for commercial vehicles.