Second wave to reduce CV volume growth to 23-28% this fiscal year, Auto News, ET Auto

With closures becoming widespread in May, the movement of freight, and therefore the profitability of fleet operators, would remain under pressure, weighing on demand at least in the first quarter, Crisil said in a statement.

New Delhi: Intense second wave of Covid-19 infection and subsequent regional lockdowns will limit domestic commercial vehicle (CV) sales volume growth to 23% to 28% this fiscal year compared to previous projection of 32% at 37% expected before its appearance, the rating agency Crisil said in a report on Monday.

However, the agency expects demand to pick up from the second quarter with an easing of blockages and an acceleration in the pace of vaccinations.

In the previous fiscal year, volume growth had been held back to a ten-year low, in large part due to low freight availability and the impact of the pandemic. According to the rating company, the CV market has seen two consecutive years of sharp declines in volumes of 29% and 21% in 2020 and 2021, respectively, following multiple headwinds such as revised axle standards, the BS-VI transition and the pandemic.

With closures becoming widespread in May, the movement of freight, and therefore the profitability of fleet operators, would remain under pressure, weighing on demand at least in the first quarter, Crisil said in a statement.

He expects, however, that as lockdowns ease from the second quarter onwards, demand and freight rates could normalize, boosting GC demand. Crisil also said that CV manufacturers’ credit metrics are expected to improve as margins increase through better capacity utilization and a better product mix.

Second wave to reduce CV volume growth to 23-28% this fiscal year
According to Hetal Gandhi, director of CRISIL Research, the volume of MHCV, which has been more affected in the last two years, is expected to experience strong growth of 35 to 40% this year, driven by the government’s infrastructure effort and the resumption of economic activity.

She further said light commercial vehicles could grow 15-20% given continued last mile demand from e-commerce, consumer staples and the aftermarket.

“Bus demand – the segment hardest hit due to school closures and lack of demand from public transport companies and businesses – is expected to increase from 67% to 72%, but will remain at its lowest for several years. years. The overall CV volume would still be around 30%. % lower than the level for fiscal 2019, ”Gandhi added.

Crisil noted that OEMs are unlikely to get a boost from the wholesale push as dealer inventories were at fairly high levels of 35-40 days at the end of March (up from normal levels of 25 to 30 days). Inventories had risen sharply in the second half of the year after inventory near zero at the start of the previous year due to the BS-VI transition, he added.

Second wave to reduce CV volume growth to 23-28% this fiscal year
Highlighting a positive factor according to the agency, the growth in revenues relative to volumes will be accelerated this year. A better product mix due to higher sales of more expensive MHCVs compared to light commercial vehicles would boost average achievements, he added.

On the commodity cost front, Crisil said, inflation in raw material costs, especially in the form of steel prices, is expected to be passed on to consumers largely, as is the case. previous fiscal year which saw price increases of 10-15% due to both commodity inflation.

“Higher revenues, coupled with better capacity utilization (~ 38% to ~ 45%) and control over fixed costs, should help CV manufacturers improve their operating margin this year to around 7% “, Naveen Vaidyanathan, associate director, Crisil Ratings, mentioned.

He further mentioned that last year, players achieved an operating margin of 4.4% despite a 10-year low volume due to significant operational improvements and reduced fixed costs.

Second wave to reduce CV volume growth to 23-28% this fiscal year

OUTLOOK

Crisil noted that with improved profitability, investments – sharply reduced last year – are expected to more than double this year to reach normal levels. Nonetheless, higher profitability would stimulate free cash flow generation and help reduce debt. He expects demand to pick up from the second quarter with an easing of blockages and an acceleration in the pace of vaccinations. A third wave of Covid-19 could weaken sentiment further and will also be a key controllable element, the agency stressed.

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