Truck sales enter slow lane as replacement demand wears off
3 min read 11 Jul 2016, 01:19 AM ISTSales of medium and heavy commercial vehicles expanded 21.5% in April and May as compared with 30% in March and 22.4% in the December quarter
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Mumbai: After expanding briskly for nearly two years, sales of medium and heavy-duty trucks are moderating as replacement demand, one of the key drivers of growth so far, starts to wear off. Weak freight rates and lower demand for cargo trucks too have dented volumes.
Sales of medium and heavy commercial vehicles expanded 21.5% in April and May as compared with 30% in March and 22.4% in the December quarter, according to the Society of Indian Automobile Manufacturers. Sales of such vehicles, a key barometer of the country’s economic activity, rose 4% to 24,500 units in June from a year ago, monthly sales data showed.
Executives at truck firms refuse to read much into the figures and remain optimistic of sales rising at a fast clip again in September ahead of the festive season and a change in emission norms from April 2017. But analysts have been surprised at the sudden moderation and some of them have even pared their sales projection for the full year.
“It is the beginning of the low period during monsoons but demand is set to pick up from September onwards when the pre-buying kicks in before the change in emission norms next year," said Ravindra Pisharody, executive director for commercial vehicles at truck market leader Tata Motors Ltd in an interview last week.
An implementation of the stricter Bharat Stage IV norms of emission from April 2017 is set to make trucks dearer by up to ₹ 1.5 lakh to ₹ 2 lakh depending on the load carrying capacity. Typically, in order to beat the price hike, transporters advance their purchase ahead of policy and regulation change.
Tata Motors’ medium and heavy commercial vehicles sales dropped 11.2% to 10,147 units in June from a year ago as the company dispatched fewer units to dealers to avoid a stock build-up, said Pisharody. Sales at Ashok Leyland Ltd, the second largest in the pecking order rose 8% to 8,685 units. Sales of Eicher Trucks and Buses rose 1005 units in June against 529 units a year ago. But sales of Volvo Eicher trucks, the joint venture between Eicher Motors Ltd and Volvo, fell to 47 units in June from 100 units a year ago. The entity makes high tonnage vehicles with gross vehicle weight above 16 tonnes.
Unlike rivals Ashok Leyland and Eicher Motors, which offer credit ranging from 30 to 90 days, Tata Motors doesn’t offer credit to dealers and operates on the so-called “cash and carry" model. As a result, a Tata Motors’ dealer tends to postpone purchase in the event of sluggish demand fearing a stock pile-up even as dealers of other two go ahead as they have a window in the form of credit, said an analyst at a domestic brokerage firm who declined to be identified.
Even as Pisharody maintains there will be a strong comeback in demand in the last month of the current quarter, he concedes that an unexpected slowdown in demand for haulage or cargo trucks has moderated overall volumes. “It was the cargo vehicles that were driving demand towards the second half of last year, but now it’s the tippers (used in the mining and construction) that are leading the growth," said Pisharody, pointing out that a price hike of 1.25% taken by Tata Motors last month and a levy of tax collected at source of 1.25% on vehicles above ₹ 10 lakh, also weighed down volumes.
Some also blame the tepid sales on benign freight rates. In spite of a diesel price hike, transporters haven’t been able to raise the freight rates, which in turn has impacted their viability, said Anuj Kathuria, head of trucks at Ashok Leyland. However, like Pisharody, he too remains optimistic of the road ahead. “These are short-term issues, which we believe will be addressed with a good monsoon, an increased in consumption on the back of the seventh pay commission payouts and a pick up in infrastructure sector," he said. For the full year, he expects sales to advance 15%. Vinod Aggarwal, chief executive at Volvo Eicher Commercial Vehicles Ltd too is confident of ending fiscal year 2017 with a double digit sales expansion.
But analysts are not as optimistic. “We believe freight demand in the economy is weak and our channel checks suggest replacement demand is also moderating. Slowdown in the below 25-ton segment is even more steep, while truck freight rates are not increasing," wrote Hitesh Goel and Nishit Jalan, analysts at Kotak Institutional Equities Research in a 4 July report.
