Near-term outlook moderates for heavy commercial vehicles

Near-term outlook moderates for heavy commercial vehicles

The onset of the third quarter is suggesting a moderation in sales of medium and heavy-duty commercial vehicles (M&HCV). Cumulative domestic sales volumes of two segment leaders—Tata Motors Ltd and Ashok Leyland Ltd—during November were relatively flat, registering a mere 1.7% month-on-month (m-o-m) growth to 18,545 units.

Of course, they rose 11.4% on a year-on-year (y-o-y) basis, but sequential numbers are relevant, particularly because sales had dipped by a massive 30.1% m-o-m in October.

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Two months of a sequential decline in growth raises some concerns. Is there a slowdown setting in? After the brisk run-up during the last 12 months, one would hope that lower sales growth is a temporary blip. Company managements reiterate the same thinking. But vendors to the M&HCV segment report a production cut-back until December as there is stock in the inventory pipeline at the dealer end. Truck firms had increased inventory anticipating pre-buying at lower prices before the new emission norms set in from October.

But manufacturers attribute lower sales growth to supply constraints. A senior executive of a leading auto component company states that supply constraints are visible for a few critical parts as a result of new models being introduced to comply with the new Bharat Stage III emission norms. This affected Ashok Leyland’s sales more sharply—its November domestic sales volumes dipped 16.3% to 3,842. Tata Motors, despite its higher base, registered a 7.7% m-o-m growth in volumes during November to 14,703 units. Hence, Ashok Leyland shares have dipped 3.3% to 72.6 apiece since October. But Tata Motors shares, driven by more stable volumes and the turnaround of Jaguar Land Rover, have risen 17% to 1,314.5 apiece.

Tempering sales growth could also be due to sales deferment due to the year-end phenomenon, as consumers postpone purchases till January to fetch them a better resale value. Another reason for lower sales momentum is a price increase, of about 2-5%, to partially offset higher raw material costs, and the cost of implementing new emission norms.

However, while the reassurance of a pick-up in growth comes from robust domestic economic growth, especially with higher agricultural output this year, freight rate trends so far are not encouraging. A monthly update by the Indian Foundation of Transport Training and Research says that in the past four weeks, truck freight revenue for the trunk routes passing through Uttar Pradesh has dropped by 3.5-6.8%. Higher fuel costs would have translated into higher freight rates, which should reflect in numbers. But this drop could also be attributable to overloading of trucks, a common fallout of rising fuel prices. Industry experts do not expect any major pull-back in demand or sales of M&HCVs during December, implying a subdued quarter ahead. Of course, from an investor’s viewpoint, higher operating leverage and productivity measures may help manufacturers offset cost pressures to retain the operating profit margin. Besides, the steady volumes of buses would also protect margins. For example, in November, Ashok Leyland registered a 16.4% m-o-m and 14.7% y-o-y increase in bus sales to 1,710 units as a result of steady orders from state transport undertakings. Company managements are confident that the last quarter will see an improvement. This will be critical to bolster earnings in the second half. Until then, investors could adopt a wait-and-watch policy for commercial vehicle stocks.

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