Slowdown in MHCV Sales Volumes in Past 2 Months: A Change in Trend
The decline in the year on year sales growth in the Medium and Heavy Commercial Vehicles (MHCV) segment in June-July 2016 is a digression of the trend observed previously, says India Ratings and Research (Ind-Ra). The agency believes that persistence in the slowdown in MHCV volumes in the next two to three months could point towards a change in the MHCV cycle.
Ind-Ra had earlier highlighted in its report ‘FY17 Outlook: Auto’ that auto sales in FY17 will be driven by the MHCV segment. In January 2016 Ind-Ra had estimated MHCV volumes to grow by 12-15 percent year-on-year in FY17 driven by demand for high tonnage vehicles to achieve cost efficiency in operations and replacement demand of old vehicles. The agency may re-look at its growth estimates based on MHCV volumes registered in the next one to two months.
The upturn in the MHCV cycle began around January 2014. The year-on-year growth was very strong at 30 percent in FY16 and 16 percent in FY15. As per Ind-Ra’s assessment, the growth is attributed to pent-up demand, some pre-emptive purchases in August-September 2015 (due to new safety features being made compulsory from Oct 2015 – which increased prices) and improved cash flows of fleet operators due to the decline in diesel prices and the entire decrease not being passed on to clients. Another factor possibly supporting MHCV sales is the uptick in mining and the increase in infrastructure spending by the government in FY16/FY17, compared with previous years.
Consistent demand had been witnessed in FY15 and FY16 in the higher tonnage segment of MHCVs (>25T) typically used for long haul – fleet owners seem to be intent on reducing their per ton transportation costs by taking advantage of better road infrastructure in the country. The data compiled by Society of Indian Automotive Manufacturers for June and July 2016 indicates a decline of 9.2 percent and 24.9 percent respectively, in this segment in these two months.
The surge in the demand for MHCVs witnessed in the past two years is not corroborated by the Index of Industrial Production which has displayed an inconsistent trend in this period. Growth figures for MHCVs are also not supported by data on foreign direct investments in the country, with the major proportion of investments by FIIs in FY16 having been in the services sector, rather than in manufacturing. In addition, growth in the gross fixed capital formation (which is an indicator of an uptick in economic activity) has been tapering down in the past three years (FY16:3.3 percent, FY15: 7.9 percent, FY14: 13.6 percent). Further, capacity utilisations across industries have not improved, even growth in exports while positive, continue to be tepid. Also freight rates after declining towards the end of FY15 have remained flat in FY16, with a slight increase in certain sectors in the current financial year.
Historically, MHCV sales display a high degree of seasonality, with weak sales in the month of December due to the preference of buyers to purchase vehicles bearing the registration number of the next year (for better pricing in the second hand market), followed by a steady uptick in volumes in the following three months, namely January-March. Sales tend to peak around the month of March every year, as fleet owners increase purchases in Q4 to avail of depreciation benefits and use up their budgets and auto OEMs push sales to their dealers to achieve annual sales targets.
Naturally, the month of April each year registers the lowest sales due to sales peaking in March. However, in May, June and July sales volume start their upward trend again. It may be noted that in 2016, the sales volume growth from June onwards has been muted. For June 2016 on a year on year basis, the volume growth slowed to 1.9 percent compared to the growth of 21% in June 2015, while for July 2016 volumes contracted by 7.6% compared to growth of 30% in July 2015. The agency will be closely monitoring MHCV domestic sales volumes for the next few months, as it believes that a steadily declining trend would possibly indicate a reversal of the sales trend in this segment.
(India Ratings and Research a wholly owned subsidiary of Fitch Group is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.)