India’s commercial vehicle (CV) sales volume is expected to grow in the mid-(14 to 17) to high (18-19)-teens over the next few years, stated a report by Fitch Ratings on Friday. The growth in the segment is expected due to a 26 per cent recovery in the financial year ending March 2022 (FY22) from Covid-19 pandemic-hit FY21.

The sales volume had taken a toll during pandemic, however, a recovery in medium and heavy commercial vehicle (MHCV) from multi-year lows, along with sustained growth in light CV (LCV) categories, will help overall CV volume reach close to one million units by the financial year 2023-2024 (FY24) – the level of the last cyclical peak recorded in the financial year 2018-19 (FY19).

According to the report, a growth in the passenger CV category, which experienced a sharper pandemic impact due to travel restrictions and the suspension of school and office commutes, is also likely despite its smaller share of below 15 per cent of overall CV volume prior to the pandemic.

The report said a rapid recovery in India’s economic activity levels after the pandemic and the government’s planned increase in infrastructure spending will help sustain an improvement in fleet utilisation rates, supporting freight economics for operators. This should support the revival of the replacement cycle, notwithstanding pressure from high inflation and a rise in borrowing rates since the start of the Russia-Ukraine war.

High fuel rates will also spur the replacement of older CVs with new, more energy-efficient vehicles, including those with compressed natural gas drivetrains in the smaller categories.

Replacement demand remained muted in the past few years, as multiple challenges affected purchase decisions, despite rising fleet age, Fitch said in its report. These included excess system-wide capacity, following revised axle-load norms, increased vehicle costs following the adoption of more stringent BS6 emission norms and weaker financing availability.

Fitch said that it believed growing loan disbursements by CV financiers will bolster sales over the medium term. Improving earnings visibility for fleet operators, along with manageable asset quality and funding access for lenders, should underpin improved credit availability.

“We expect growing demand and the resultant rise in operating leverage to boost profitability at India’s CV-focused original equipment manufacturers after FY22, despite elevated production costs,” reported ANI citing the report.

Factors boosting growth

India’s quick and broad-based economic rebound has helped revive CV sales after the impact of the second wave of the Covid-19 pandemic in the first quarter of the financial year 2022 (1QFY22). CV volumes in the first half of the financial year 2022-2023 (H1FY23) exceeded 450,000, up by 21 per cent from the H1FY20 pre-pandemic level, data from industry body Siam showed.

Fitch said it expected India’s GDP to grow at a slower rate after a robust 8.7 per cent year-on-year recovery in FY22, against the backdrop of a tighter global monetary policy environment and inflationary pressure. Nonetheless, Fitch expects the growth rate to remain healthy at close to 7 per cent in the next few years.

Recovering economic activity levels and higher infrastructure spending under the government’s budget have supported improved fleet-utilisation rates for CVs. This is evident from the rising freight rates and the improving profitability of fleet operators since H1FY22, the report said.

These factors, along with improved financing availability, have lifted buying-sentiment in recent quarters, spurring the revival of replacement demand. This is despite the increased cost of ownership, due to a rise in fuel and commodity prices and an uptick in borrowing rates after the start of the Russia-Ukraine war, the report said.

Fitch said it believed favourable trends in freight economics will continue, considering a healthy demand environment, supported by steady GDP growth and increasing government spending on enhancing the country’s infrastructure. It also added that robust gains in sales share of compressed natural gas variants in the intermediate and small categories, which offer higher fuel cost-efficiency compared with conventional diesel variants, underscore our view.

Fitch Ratings said it expected volume in the medium and heavy commercial vehicle (MHCV) segment – which typically exhibits a higher degree of cyclicality due to end-market exposure and higher dependence on financing – to recover by more than 20 per cent y-o-y in FY23, faster than the broader CV industry.

(With inputs from ANI)