Is the decline in CV sales a blip?

Trucks bound for other states passing through Delhi will now have to pay a green tax for adding to the city's pollution

  The Ashok Leyland stock has shed five per cent since it declared its sales volumes for August. Medium and heavy commercial vehicles (M&HCV) sales in August were down eight per cent over year, the second month of decline. Tata Motors had eight per cent decline in July, while August sales were down 17 per cent. So, is this a trend in the making or a blip?

Tata Motors indicated that the fall in sales was on postponement of replacement and fleet expansion. Analysts also attribute the muted August show to fall in freight rates. In the higher tonnage segment (37 tonnes), the company stayed away from discounts, which led to lost sales, say analysts at Motilal Oswal Securities.

Analysts at Icra Ratings believe contraction in truck sales can be explained by waning of replacement-led demand, weak cargo demand, especially from industrial sector, and slowdown in construction and mining. Inventory has gone up. Another reason is base effect as customers bought CVs in September 2015 quarter ahead of the implementation of anti-brake locking system from October 2015. What is denting profitability of the truck user industry is weak freight rates over the last few months and rise in diesel prices.

Tata Motors has a more diversified product base unlike Ashok Leyland, a pure play on trucks. So, the impact on its stock or financials may not be the same. In fact, for August, Tata Motors' domestic passenger vehicle (PV) sales were up 17 per cent over year; light CV sales were up 10 per cent (thus, overall CV sales were down three per cent). Its stock is up 2.3 per cent after August numbers. Most analysts believe demand would come back in the second half of FY17, on pre-buying ahead of BS-IV implementation from April 2017 and pickup in construction and consumption. Higher consumption from pay commission outgo as well as one-rank-one-pension could mean demand and more freight rate. Biggest trigger for CV makers is proposed vehicle modernisation programme which will involve scrapping of old vehicles.

Analysts at Edelweiss believe Ashok Leyland, being a dedicated M&HCV player, will gain most. They estimate that after programme implementation, the company will see a 42 per cent improvement in earnings and 800-basis-point return on capital employed (ROCE) expansion (over FY16-19). Higher volume is expected to help company post a 19 per cent annual revenue growth over the next three years, and low debt is expected to improve profit. For Tata Motors, a pick-up in CV sales will add to robust show of Jaguar Land Rover and India passenger vehicle and LCV businesses.
The sales numbers for next few months should give an indication of whether the street has been right in estimating a recovery in second half of the fiscal.