Cost pressures set to impact commercial vehicles’ market dynamics2 min read . Updated: 27 Nov 2018, 08:31 AM IST
The high growth rates in commercial vehicle sales and the high base may see demand moderate over the next 12-18 months
Small fleet operators (SFO), or those that operate about five trucks, were already under pressure after the goods and services tax (GST) was introduced. But the recent rise in operating costs has been a bigger blow.
Fuel cost, which comprises 50% of the freight rate charged by transporters, rose by nearly 21% between April and October, compared to the year-ago period. A study by Crisil Research points out that spot freight rates of large fleet operators (LFOs) rose by only 6% during the period. Others were perhaps worse off with a 4% increase. Evidently, transporters are finding it hard to pass on the rise in fuel prices to customers. Then there are rising cost of drivers and insurance, too.
“Large fleet operators may be able to weather the pain as most of them work on long-term contracts with big customers and with built-in escalation clauses to pass on costs. SFOs, however, are in a jam as they work on spot rates," said Hetal Gandhi, director at Crisil Research. Further, costs of ownership after the new emission norms are also higher than a year ago.
In fact, earlier regulatory action to curb truck overloading and GST rollout had already marginalized SFOs, especially those who owned medium and heavy commercial vehicles (MHCVs). High cost of compliance had resulted in margins being squeezed.
Crisil’s estimate is that the Ebitda (earnings before interest, tax, depreciation and amortization) margin for SFOs in FY19 will be dented by 250-300 basis points, compared to the year before. One basis point is one hundredth of a percentage point.
So, will this margin pressure for SFOs lead to a drop in demand for CVs? Not really.
The demand from the infrastructure and construction segments should be enough to keep sales ticking. There could be a change in dynamics as LFOs will now have a greater role to play with SFOs in trouble, especially in MHCVs. In fact, the input tax credit that is available under GST is likely to incentivize LFOs to buy new trucks, instead of second- hand trucks. The earlier trend of hiring vehicles from SFOs may also reduce due to this.
Perhaps, the high growth rates in commercial vehicle sales and the high base may see demand moderate from high double-digits to relatively lower double-digits for at least in the next 12-18 months.
What could also happen is that SFOs might shift towards light CVs at least in the interim, hoping to stay in the game. That said, costs of operation are rising in that segment, too, and utilization of capacity is far from optimal.