Credit Outlook For CV Players Seen Stable Despite A Sober 4% Volume Growth Forecast For MHCVs: CRISIL
CRISIL expects volume growth of medium and heavy commercial vehicles (MHCVs) to be subdued at ~4% this fiscal, compared with strong double digits in fiscals 2018 and 2019. LCV volumes, too, would moderate, but still grow at a healthy 9%.
The first half of this fiscal is expected to be particularly weak because of change in axle norms, soft freight rates, subdued economic growth, and lingering liquidity crunch impacting non-banks, which finance about half of CV sales.
However, in the second half, fleet operators are expected to advance their purchases planned for fiscal 2021 because vehicle prices are seen increasing 9-11% following the transition to BS VI emission norms. That would lend a fillip to sales.
“Additionally, the transition to BS VI norms is expected to increase the weight of an MHCV by 300 kg on an average because of additional exhaust management components – unless manufacturers opt for costlier lightweight materials,” said Hetal Gandhi, Director, CRISIL Research. “That would mean a 2% reduction in the average MHCV payload of 18 tonne which, in turn, would impact the profitability of transporters and also encourage pre-buying.”
The benefit of pre-buying will be partially offset by inventory liquidation. With the Supreme Court barring registration of BS IV vehicles after March 31, 2020, dealers would begin liquidating BS IV models as the deadline nears. Net-net, that would reduce overall wholesale volumes for this fiscal.
In the milieu, CV makers will have to walk a tightrope between sales growth and inventory liquidation. Excess production would mean higher discounts or write-offs.
Tepid volume growth and stable pricing would mean overall CV industry revenue would rise ~8% to ~Rs 120,000 crore this fiscal.
However, despite the moderation, the credit outlook for the CV industry is expected to be stable1. That’s because of steady operating margins stemming from benign forecast for steel and aluminum prices, and high capacity utilisation of ~80%.
As for the CV industry’s operating profit, it is seen rising a healthy 8% to about Rs 12,500 crore this fiscal, while capex is seen moderate at ~Rs 5,000 crore. Consequently, players should continue to generate positive free cash flows.
That would also follow a significant improvement in the financials of CV players over the past five fiscals, driven by strong volume growth and operating leverage.
“Operating margins of CV manufacturers improved sharply to ~11% in fiscal 2019 from near break-even levels in fiscal 2014, driven by an average 15% volume growth in MHCVs,” said Naveen Vaidyanathan, Associate Director, CRISIL Ratings. “That enabled players to sharply reduce financial leverage, leading to strong credit metrics that should sustain in this fiscal as well.”
In the wake of a decisive mandate at the recently concluded general elections, stable economic policies, higher infrastructure investments and gradual recovery in consumption could bode well for the CV sector over the medium term. Declining interest rates would also provide a tailwind to demand.
1 CRISIL has considered the CV segments of Tata Motors and Mahindra & Mahindra, Ashok Leyland and VE Commercial Vehicles for the analysis. These together constitute about 85% of the industry revenues.