Robust growth in CV sales owes more to govt policy than economic growth
The February sales of commercial vehicle (CV) manufacturers echoed the optimism seen in the last few months, promising to make FY18 a bumper year with strong double-digit growth after nearly six long years. However, it is equally important to take note of the fact that this time around the cyclical surge has been powered mainly by government policy measures, not quite by economic growth that usually goes hand-in-hand with robust truck sales.
After picking up in the September and December quarters, sales continue to whizz past estimates. Second-largest CV maker Ashok Leyland Ltd’s February sales easily beat estimates on the Street, as its mainstay medium and heavy CV sales jumped by 21%, with total sales soaring by 29% year-on-year. Tata Motors Ltd, which has the largest share of the market, posted a hefty 36% growth in domestic CV sales during the month. Eicher Motors Ltd too clocked a decent 26% year-on-year sales growth.
CV manufacturers and analysts concede that the heightened demand is a response to strict implementation of overloading restrictions across several states. Besides, the shift towards BS-IV emission compliance spurred demand for these vehicles.
Also, Ashok Leyland’s management, in response to a query from Mint, said that the introduction of the goods and services tax has improved the speed of transport and forced faster migration of the CV fleets to higher tonnage vehicles to improve economic viability. This, in turn, has triggered demand growth for replacements.
In fact, analysts say that the shift towards modernizing fleets has been faster than the pace of production ramp-up. High demand has lowered the level of discounts in the industry—a transition from about a year ago, when it was a buyer’s market with companies and dealers doling out discounts to push sales.
That said, economic growth too has helped. The huge infrastructure push by the government towards road projects, rural development and smart cities has increased demand for larger multi-axle trucks, long-haul trucks and tippers. In fact, the trend reversal in CV sales this time around has seen a higher growth in tonnage capacity of vehicles than in number of vehicles.
As if this is not enough, the party may continue if the government announces a policy on scrapping of old trucks (beyond 15 years). The Street expects incentives for replacing old trucks that would be the next demand-pull trigger.
However, one must note that the current heady growth figures are partly due to weak numbers in FY17, a low base. Meanwhile, higher interest rates in the near future is a given. Therefore, growth may taper from the current heady highs.