Teji Mandi Explains: Positive signs emerge for commercial vehicle industry with improved level of economic activities

Sales of commercial vehicles are showing signs of pick up. Sales data recorded in June 2021 indicated positive growth as demand remained strong for the entire period of March-June 2021.

A Breather After A Freefall

It is a major positive for the industry after a free fall between the FY18-21 period. The descent was accelerated by poor economic growth combined with numerous regulatory and non-regulatory interventions. It included a revision in axle load norms, creating access carrying capacity in the system, GST reforms, and BS-VI implementation.

The pandemic worsened the economic outlook of the industry as MHCV utilisation levels dropped below 60% in FY21. MHCV volumes in FY21 were the lowest since FY09.

Is The Worst Over?

India is at the cusp of starting a new economic cycle, while the commercial vehicle sector is poised for the next leg of growth. As economic growth is expected to pick up sharply from 2HFY22 onwards, fleet utilisation levels and operator profitability are expected to improve. It, in turn, should spur replacement and pave way for fresh demand.

Light commercial vehicles emerged as the flag bearer for the CV industry and attracted the highest demand during the pandemic months. However, industry experts are seeing demand for heavy-duty trucks to accelerate once construction activities pick up the momentum.

Replacement demand is also expected to be a major volume driver over the near-medium term after taking a backseat in the FY20-21 period. Fleet operator profitability is also showing a few signs of improvement. In Mar-Apr 2021, gross profit per trip on major trade routes breached the 40% mark for the first time since Feb 2019.

Improving Profitability of Fleet Operators

Improving freight rates will increase absolute earnings for the operators. It is a strong factor to believe in the revival of demand for MHCVs. Historically, there has been a strong correlation between the profitability of the operators and MHCV demand.

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