Home >Opinion >Online-views >August sales show worsening commercial vehicle cycle

August sales of medium and heavy commercial vehicles fell harder than expected. Market leader Tata Motors Ltd, which has a little over half the market share, sold 12.1% fewer vehicles than it did a year ago. The rather distant No. 2 player, Ashok Leyland Ltd, posted an 8.6% decline.

Photo: Ramesh Pathania/Mint

Not surprisingly, falling sales at these two major companies have turned analysts cautious on the outlook for the sector, as they account for nearly 83% of the domestic market. Until now, there was a glimmer of hope that the second half of fiscal 2013 (FY13) would be better than the first. But macro indicators tell a different tale, with no reason for a near-term revival.

Data from the Indian Foundation of Transport Research and Training shows a 3-4% decline in truck rentals in August, translating into a cumulative drop of around 12% from April till date. The report says that a 15-20% all-round drop in cargo availability across the country hints at a severe crisis in the truck transport business. Falling cargo reflects poor offtake of goods and services, gradually being felt across sectors.

The key question now is—how long will this downtrend last? A report by Emkay Global Financial Services Ltd explains that, historically, periods in which truck sales have outpaced economic expansion have been followed by sub-par growth. It adds, “The longest expansion cycle of FY01-08 terminated with 36.3% contraction in FY08-09." Perhaps the government’s stimulus package in FY09 (with excise duty cuts and depreciation benefits) neutralized the correction, or rather, delayed the inevitable slowdown.

So far, light commercial vehicle growth is shoring up overall commercial vehicle sector numbers. Nonetheless, growth has moderated to 14% from a high of 25% in the last couple of years.

The only area that suggests a positive trend is the 12% expansion in bank credit to transport operators (for the first four months of FY13, over the year-ago period). But this could be due to higher borrowings to fund operations during challenging times. Further, it is on a low base of the previous year period, when there was a 4% credit contraction.

In short, the near-to-medium term looks bleak, even if there is a slight uptick in sales during the festival season. According to Abhishek Banerjee, senior analyst at Asian Markets Securities Pvt. Ltd, “Only a rebound in manufacturing and agriculture will translate into better utilization of trucks and higher freight rates, which will then lead to expansion in truck sales."

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