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Commercial vehicle industry on a bumpy road

— FILE PHOTO

DIFFICULT TIMES: Workers giving final touches to one of the commercial vehicles of Tata Motors at the company’s Pimpri plant in Pune.

The Indian commercial vehicle (CV) industry, under pressure for over a year with rising input costs and lack of demand, slipped further into a morass as the third quarter results came in.

The period saw both the industry majors, Tata Motors and Ashok Leyland, take a significant beating on their bottomlines. Tata Motors reported a loss of Rs. 263 crore and Ashok Leyland saw an 80 per cent drop in its net profit over the year-ago figure at Rs. 21 crore.

Ravi Kant, Managing Director, Tata Motors, while tabling results a fortnight ago, said “We had the worst scenario in the third quarter and I hope not to see this again in my lifetime.”

The commercial vehicle segment appeared to have only mirrored the prevailing economic mood. Reduced availability of credit and high cost of finance remain the main reasons for the current scenario in the commercial vehicle market, while falling industrial growth rate added to its woes.

“In the long run, a slowing industrial production can be more ominous than the short-term problem of non-availability of credit,” D. R. Dogra, Deputy Managing Director, Credit Analysis and Research (CARE), told The Hindu.

High raw material prices in the first half of the year pressured the majors to raise prices.

“To recover costs, manufacturers resorted to a series of price hikes from the beginning of 2008-09. This led to a tricky situation where manufacturers increased vehicle prices when demand was actually falling,” said Mr. Dogra.

Subsequently, commercial vehicle producers cut back on their capital expenditure programmes. Mr. Kant said the company was likely to downsize its programme by Rs. 700-800 crore from its estimate of Rs. 1,800 crore.

Ashok Leyland too has slashed its investment of Rs. 3,200 crore over the next three years to Rs. 2,000 crore.

The going has become tough for freight operators. The first half of the year saw diesel prices go up, though freight rates failed to move in tandem, thereby denting their profitability. Operators decided to postpone vehicle purchase due to higher vehicle and financing costs.

Sachin Mathur, Head, Crisil Research, feels that the basic concerns at the transporters’ end will continue, mainly the availability of freight which depends on the economy and industrial growth. This has, in the main, led them to defer replacement purchases. In terms of finance, interest rates have come down but the problem is of repossession of vehicles and delinquencies and therefore, financiers are selective about financing purchases.

Despite the slowdown, manufacturers seem to bank on new vehicle launches to boost sales. Tata Motors is expected to launch its Marcopolo buses as also ‘World Truck’. Ashok Leyland intends to introduce its new models such as 4930 TT, 4018 Super and i-Bus. Mr. Dogra felt that the commercial vehicle industry growth would be weighed down by the adverse macro-economic environment in the short-term. “It is not only about financing. The real issue is that there is no freight movement. The economic scenario has to improve and banks have to start lending.”

Mr. Mathur said one was not so sure about an immediate upturn in the industry, but maybe the worst was behind now. What has changed is that due to the production cuts, inventory at the dealers end is falling and so one would not see the kind of fall as seen in the third quarter. Things will remain difficult for the next few quarters because the essential solution is an economic recovery. As regards new model launches, it is difficult now, but most of the plans would have been under way and they may introduce new models selectively.

A recovery can be expected from the third quarter of 2010.

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