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Second wave to limit CV volume growth to 23-28%: Crisil
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SME Times News Bureau | 07 Jun, 2021
The intense second wave of Covid-19 afflictions and consequent lockdowns
will limit growth in the domestic commercial vehicle (CV) sales volume
to 23-28 per cent this fiscal, compared with 32-37 per cent expected
prior to its onset, Crisil said on Monday.
Volume growth had
hard-braked to a decadal low last fiscal. But according to the ratings
agency, credit metrics of CV makers are expected to improve as margins
expand on better capacity utilisation and product mix.
The CV
market saw two consecutive fiscals of steep volume decline (29 per cent
and 21 per cent in 2020 and 2021, respectively), following multiple
headwinds such as revised axle norms, BS-VI transition, and the
pandemic.
While a sharp recovery from the lows was on the cards
this fiscal, it will be constrained by a weak first quarter because of
the second wave of the pandemic, the agency said in its report that
accessed the CV market in India.
In April, freight rates fell 20
per cent even as diesel prices remained elevated, hurting fleet
operators. With lockdowns becoming widespread in May, freight movement,
and consequently the profitability of fleet operators, would remain
under pressure, weighing on demand at least in the first quarter.
As lockdowns ease from the second quarter, freight demand and rates could normalise, aiding demand for CVs.
Says
Hetal Gandhi, director, Crisil Research, "MHCV volume, which was hurt
more in the past two fiscals, should see a strong 35-40 per cent growth
this fiscal, driven by the government's infrastructure thrust2 and
revival in economic activity. LCVs could grow 15-20 per cent given
continued last-mile demand from e-commerce, consumer staples and the
replacement market. Demand for buses - the segment hit the hardest
because of schools shutting and lack of demand from state transport
undertakings and corporates - should grow 67-72 per cent, but will
remain at multi-year lows. Overall CV volume would still be 30 per cent
below fiscal 2019 level."
OEMs are unlikely to get a fillip from
wholesale push because inventories at dealers were at fairly elevated
levels of 35-40 days as of end-March (against normal levels of 25-30
days). Inventories had risen sharply in the second half after near-zero
inventory at the beginning of last fiscal due to the BS-VI transition.
However,
one key continued positive this year would be faster revenue growth
versus volumes. Better product mix due to higher sales of costlier MHCVs
compared with LCVs would provide a fillip to average realisations. Raw
material cost inflation, particularly in the form of steel prices, is
expected to be largely passed on to consumers, similar to last fiscal
which saw 10-15 per cent price increases due to both BS-VI and commodity
inflation.
Says Naveen Vaidyanathan, Associate Director, CRISIL
Ratings, "Higher revenue, coupled with improved capacity utilisation (up
from 38 per cent to 45 per cent) and control on fixed costs, should
help CV makers improve operating margin this year to 7 per cent. Last
year, players had eked out operating margin of 4.4 per cent despite
decadal low volume due to significant operational improvements and
reduction of fixed costs. But notably, margins this year would still be
lower than the average 9.5 per cent achieved over fiscal 2016 to 2019."
With
improved profitability, capex - cut sharply last year - should more
than double this year to normal levels. Nevertheless, higher
profitability would drive free cash flow generation and help lower debt.
This would support an improvement in credit metrics - interest cover
should improve to 3.6x from a low of 1.5x last fiscal, Crisil said.
The
forecast is predicated on recovery in demand from the second quarter
with easing lockdowns and pace of vaccinations picking up. A third wave
of Covid-19 could further dampen sentiment, and will be a key
monitorable, too.
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