The Commercial Vehicles (CV) segment,for which growth comes in a cyclical pattern of four-odd years, is back ontrack. October retails were 74,443 units up 25 per cent (October 2021: 59,363units), on the back of demand from multiple sectors. The segment alsooutperformed its peers with high double digit Month-on-Month (M-o-M) volumegrowth, especially in the M&HCV domain.

Market leader Tata Motors (TML)reported volumes of 34,890 units, up 10.8 per cent M-o-M. Ashok Leyland posted 24.3per cent growth to 17,549 units while VECV volumes grew 32.5 per cent to 6,631units. Overall, the CV industry recorded a volume growth of 30.7 per cent inFY22. It logged a strong growth of 60.2 per cent Year-on-Year (Y-o-Y) in thefirst half of FY23, while year-to-date (YTD) growth (April to October 2022) wasrecorded at 52.3 per cent Y-o-Y for top five players.

Demand for medium and heavycommercial vehicles is likely to have remained strong, driven by replacementdemand. Ashok Leyland is seen gaining market share due to aggressive pricingand increased demand for higher-tonnage vehicles.

Recovery from pandemic lows

A recovery in medium and heavycommercial vehicle (MHCV) from multi-year lows, along with sustained growth inlight commercial vehicle (LCV) categories, will help overall segment volumereach close to one million units by FY24 – the level of the last cyclical peakrecorded in FY19, say analysts. Growth in the passenger CV category, whichexperienced a sharper pandemic impact due to travel restrictions and thesuspension of school and office commutes, will also aid growth. However, theirshare will be below 15 per cent of the overall CV volume.

The high pent-up replacementdemand and robust growth in end-user industries like infrastructure ande-commerce would offset headwinds, such as high-interest rates and commodityinflation. Profitability for OEMs is also expected to expand with healthyvolume sales and improved operating leverage backed by softening of input cost.

A rapid recovery in India'seconomic activity after the pandemic shock and the government's plannedincrease in infrastructure spending will help sustain an improvement in fleetutilisation rates, and supporting freight economics for operators, believeindustry experts. This should aid the revival of the replacement cycle,notwithstanding pressure from high inflation and a rise in borrowing ratessince the start of the Russia-Ukraine war.

In the second half of FY23, MHCVand LCV would grow roughly 44 per cent and 27 per cent, respectively, accordingto industry experts. However, they caution that in the second half of FY24,growth rate would taper down to 15 per cent and 5.0 per cent respectively.

While 2HFY23 growth benefitedfrom low base, pent-up demand, and chip shortage in FY22, these effects wouldwane off in FY24. MHCV growth would be highest as volumes are still lower thanFY19 peak and fleet age is above normal, which should drive replacement demand.Experts expect LCV segment to be the slowest, at 5.0 per cent.

23 per cent Volume growth expected in H2FY23

High fuel rates will also spurreplacement of older CVs with new, more energy-efficient vehicles, includingthose with compressed natural gas drivetrains in the smaller categories. Improvingearnings visibility for fleet operators, along with manageable asset qualityand funding access for lenders should underpin credit availability.

Bullish demand would translate tohigher revenues and overall improved operating leverage would result inimproved profitability, supported by price hikes by original equipmentmanufacturers. During Q1FY23, the industry reported an operating profit of 4.6per cent as compared with an operating loss of 1.6 per cent Y-o-Y. Animprovement in margins is expected to continue in Q2FY23 with ease in inputprices. The H2FY23 margins are expected to revive moderately as compared withH1FY23, with an expected decline in raw material prices and the planned pricehikes by OEMs.

While high input costs played apart, they have now started easing. The bigger problem, however, has been highdiscounting levels. Recently, Tata set a target of pushing up CV margins from 5.0per cent to 10 per cent. Tata also announced plans to increase CV prices by upto 2.0 per cent in Jan-2023. Overall, this may result in improvement in netpricing and lead to margin surprise vs. expectations.

With strong tailwinds likespurring economic activities, increased infrastructure spending, and acontinued boom in e-commerce, the CV industry will continue to maintain itsgrowth momentum in FY23 with volume growth of 20–22 per cent, say marketanalysts.