The writing on the wall is clear. With discounts increasing and the festive season turning out to be a damp squib, sales are likely to be southbound for some time.
The quagmire is falling freight rates and weak freight availability. According to the Indian Foundation of Transport Research and Training, in the last 10 months, truck rentals on trunk routes have fallen 15-17%, compared to the 12-13% drop even during the 2008-09 global economic slowdown. The drop, despite a 4% rise in diesel prices since January this year, shows that truckers, too, are unable to pass on price increases.
This boils down to a slow movement of goods, most unlike the festive-season trend in the country. The key problem is that demand, both rural and urban, has plummeted.
Explaining the paltry 3.1% growth in private consumption in Q1 FY20 (7.2% in Q4 FY19), a report by Kotak Securities Ltd says that rural consumption has been weak because of near-stagnant farm income. The report lists reasons for the drop in urban consumption: (1) trough in the savings rate, (2) worsening financing conditions and (3) fading out of government salary adjustments.
That apart, weak core-sector growth and a virtual halt in government capex aggravated the situation, besides the slowdown in exports due to global tensions.
Also, with GDP growth falling to an unexpected 5%, a recovery in M&HCV sales is unlikely in the short run. Market leaders Tata Motors Ltd, Ashok Leyland and even Eicher Motors Ltd are flummoxed by the catastrophic braking in sales. They are also destocking, given the weak demand and imminent phasing out of BS-IV vehicles by end-March.
This brings us to the next question. When will CV sales recover? Your guess is as good as mine.
According to Bharat Gianani, analyst at Sharekhan Ltd, “Normally, the downcycle in M&HCV stretches for 9-10 quarters and we are only in the fourth quarter right now. Besides, there are other factors at play this time around such as technology related steep cost increases due to transition to BS VI norms (minimum 10%). Unless, the government intervenes with measures such as the ‘vehicle scrappage policy’ or any rate cuts, the slowdown will continue for few quarters ahead."
Shares of Ashok Leyland, the sole listed entity whose financials largely mirror the state of the M&HCV sector, have so far fallen 31% in FY20. Although Tata Motors’ and Eicher Motors’ shares have fallen by the same magnitude, the financials of these CV manufacturers are a proxy for various vehicle segments.