What is the Future of Commercial Vehicles in India?

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Introduction

The demand outlook for Commercial Vehicles in India is improving with a sharp recovery in economic activities post-lock-down, increasing fleet utilization levels, strong rural demand.

Truck replacement demand is expected to remain afloat with improved utilization higher than 70%. Tata Motors and Ashok Leyland, which are dominant players in the commercial vehicles segment are expected to benefit from the strong demand momentum.

Commercial Vehicles in India Future Outlook

The profitability of Fleet Operators remained subdued for the last 3 years

Key reasons for this subdued profitability are :

  1.  Subdued Freight Rates amid Economic slowdown & dampened economic activities.
    • Overall due to slew of events in the last couple of years like demonetization, GST implementation, COVID-19 pandemic, etc impacted the GDP growth of India, which indirectly affected the commercial vehicle sector.
  2. Higher Interest Rates (accompanied by delayed Monetary Transmission in FY20).
    • Although, RBI undertook rate cuts, actual benefits of these rate cuts took time to seep into the economy due to delay in transmission of these low-interest rates by financial institutions like banks and NBFCs.
    • Also, the NBFC crisis like the IL&FS issue added to the issue of difficulty in financing.
  3. The decline in Overall Utilization of Trucks (Low Fleet Utilization)
    • A Fleet Operator makes a profit at the truck utilization of >70% (assuming stable interest rates & fuel prices).
    • In FY16, fleet operators were earning a profit of ~ INR 4.4 lakh per truck barring the financing costs like EMI, etc. As opposed to this, in FY20, fleet operators’ profitability tanked and they incurred losses to the tune of INR 26,000 per truck.
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Market Share of Commercial Vehicles in India (%)

Medium & Heavy Commercial Vehicle (MHCV) Segment
Different Segments of Commercial Vehicles in India
Different Segments of Commercial Vehicles in India
Overall Commercial Vehicles (CV) Segment
Overall Commercial Vehicles (CV) Segment
Overall Commercial Vehicles (CV) Segment
  • Tata Motors dominates the market share in the Commercial vehicle segment as well, followed by M&M and Ashok Leyland.

Improving Outlook for Commercial Vehicles in India

  • Sharp Recovery in Economic Activity post-lock-down and revival of Mining & Construction activities.
  • Fleet operators have turned profitable as of November 2020 led by an increase in truck utilization rates (improving Fleet utilization levels).
  • At a utilization rate > 70%, truck replacement demand is expected to remain afloat.
  • Also, higher rural demand on the back of improved rural income creating a favorable outlook for Commercial Vehicles (CV).

Also Watch: Commercial Vehicles Segment Analysis


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