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Uptrend in LCVs expected to sustain

Sales of light commercial vehicles (LCV) seem to be on the recovery path posting a 10 per cent year-on-year growth in February, 2016. This is the third month of consistent growth after almost 30 months of falling sales. Among top players, while LCV sales of M&M and Tata Motors grew 15 per cent and 9 per cent, Eicher Motors-Volvo joint venture reported a growth of 48 per cent.

Credit Suisse analysts in a report this week said that LCVs generally follow medium and heavy commercial vehicles (M&HCVs) with a lag (typically after six months), and in the last few months their growth has turned positive. The recovery for M&HCVs started in August 2015 when it turned positive after a gap of nearly two years. Other experts, too, see the trend to continue in case of LCVs, which has seen a three per cent decline in year-to-date sales.

Taher Badshah, senior vice president at Motilal Oswal Asset Management says that the recovery signals a turnaround and the positive trajectory of growth largely coming from replacement demand, is expected to continue. What should aid the recovery is the fall in fuel prices, which means lower operational costs and further reduction in interest rates, which would make funding more viable in a scenario of fledging economic recovery. While freight rates at the end of February improved by 4-5 per cent over January 2016 and indicating improved demand across sectors, according to analysts at Spark Capital, increase in diesel prices (though overall trend is down) since mid-February is a concern. Soft tyre prices are however a relief.

The structural long-term trends too are positive. Jatin Chawla and Akshay Saxena of Credit Suisse say that in the longer run, LCVs are more of a secular growth story given the expanding hub-and-spoke model and increasing usage on short-haul routes. The other positive, according to them, is the low penetration. Penetration is lower in India with LCV:M&HCV ratio at 1.25 to 1 as compared to 2:1 in China and more than thrice at 4:1 in Europe.

The steady growth of LCVs is critical for players such as Tata Motors as the segment is estimated to account for more than half of volumes with 20-25 per cent of revenues and profits coming from the segment. While the company continues to be the market leader in the LCV segment (includes passenger and goods vehicles), its share has been coming down. For year-to-date FY16, its share was down to 38 per cent compared to 43 per cent in the same period of FY15, with market share gains largely for M&M.