After cars, it is the turn of CVs to revv up: Report

Mumbai, Mar 10: After passenger cars, it is the turn of commercial vehicles (CV) to witness actions on the domestic Automotive terrain.

Lead international automotive majors such as DaimlerChrysler, Hyundai and others have unveiled their plans to make a foray into the Indian commercial vehicles market, said a special report of the Automotive Manufacturers Association of India.

Already, joint ventures (JVs) have been formed between Iternational Truck and Engine Corporation, an American CV major, and Mahindra&Mahindra (M&M) and between MAN, a German CV major, and Force Motors.

Tata Motors has acquired Daewoo Commercial Vehicles Company of South Korea, thereby gaining access to the Chinese and Far East Asian markets, the report added. Also, Tatas will improve its design and manufacturing capabilities through its JV with Spanish bus and coach manufacturer Hispano Carrocera.

Ashok Leyland (ALL) has concluded a technology transfer agreement with IVECO, an Italian CV major, which also gives ALL access to Chinese and other Asian markets where IVECO has a distribution channel.

These developments signal the global aspirations of Indian truck majors and a realisation that they have to look outward to sustain high growth levels.

Backed by their balance sheet strengths, the report maintained that the CV majors have in the last three years significantly improved their operational and financial performance, resulting in a healthy improvement in their balance sheets.

Many of them have started implementing sizeable capital expenditure to increase capacity through a mix of internal accruals and debt.

Some of them, including Tata, ALL and M&M, have resorted to external borrowings or quasi-equity in the form of foreign-currency convertible bonds, taking advantage of their higher share prices attracting international investors.

Any moderate increase in debt levels of these majors is likely to have a modest impact on their credit profiles. These companies are expected to benefit from an expected sales volume increase over the medium term.

Though higher steel prices have been a key concern in the last two years, the CV industry has tackled this both by passing part of the costs on to customers and by optimising other cost (payroll) and treasury efficiencies.

Global steel prices are expected to remain firm due to robust infrastructure-driven demand from China (the Olympic Games are also a factor here), India and other emerging markets.

At the same time, rising steel prices will continue to put pressure on CV pricing, the Report said and pointed out that another concern could be a slight slowdown in the Indian economy, especially in view of the continued steady increases expected in the federal funds rate (a key short term interest rate) in the US, raised to 4.50 per cent in January. This is likely to bring upward pressure on interest rates in India and could serve to reduce GDP growth, notwithstanding continued good corporate performance.
Higher domestic inflation due to increase in fuel prices is another reason why interest rates may rise. This could prove to be a dampener on the CV demand, especially given the fact that around 60-70 per cent of vehicles purchased are financed.

Yet another concern in the last year has been the prevailing high oil prices and their impact on diesel prices.

Market consensus expects oil prices to rise further and settle at a higher level.

As of March six London Brent crude was priced at USD64 per barrel. Without a concomitant increase in freight rates, this will have a negative impact on demand for CVs.

However, industry sources point out that there has been some hardening of freight rates in the last three months.

Other negative factors over the long term would be Indian Railway's plans for a separate rail corridor for freight and discounts for bulk freight movement. The development of oil pipeline networks would also be a negative.

The Report also points out certain key challenges like uncertainties about the CV cycle and successful execution of product plans. It is a challenge for auto manufacturers to maintain a wide product range while at the same time controlling development and production costs.

Auto manufacturers will require significant spending on research and development to commercialise new technologies and increasing levels of capital expenditure for new factories to expand production capacity.

Transactions promoting further globalisation like mergers and JVs are expected among auto manufacturers in an effort to gain any advantage in the market. Companies that can afford to use their internal generations rather than debt financing for such purposes would be in better position to manage any downturn in the industry.

Commenting on the Business Outlook for the current plan period, the report said the volumes in the CV industry is expected to register CAGR of sicto eight per cent in 2006-2010 due to sustained economic growth and satisfactory progress in road infrastructure in the country.

Already, financers are recording reduced disbursements for medium commercial vehicles but increasing disbursements for MAVs/TTs. Passenger CVs are expected to register higher growth rates due to better roads and increasing privatisation of passenger transport leading to greater movement of people on roads.

Competition will increase between existing players and with the entry of new players.

Established players will find it increasingly challenging to maintain their market shares.

All the same, the Growth Story Continues for the Indian commercial vehicle (CV) industry which is similar to the global CV industry in terms of cyclicality and low volumes. It is dissimilar in terms of its secular long-term growth trend and being in the early stages of road infrastructure development.

The strategy of established players has been to retain high market shares in existing segments, enter less cyclical segments, build strong positions in emerging segments in new geographies, and cut costs and increase productivity to achieve low breakeven points.

The industry reported a CAGR of 29 per cent in domestic volumes between FY02 and FY05. Exports were a robust 8.6 per cent of total volumes in FY05, signalling the acceptance of Indian-made CVs in markets that have characteristics similar to the ones prevailing in India.

This export growth will also contribute to cushioning the slowdown indomestic demand.

The growth in the sales volumes of CVs reported for the first nine months of FY06 points to a slowdown, but going by past experience, the last quarter will contribute to positive growth for the full year due to the introduction of new models and depreciation.

The domestic CV industry, which has seen an up-cycle for the last three years, is influenced by several factors: continued road infrastructure development; GDP growth at 7-8 per cent; low interest rates and availability of finance; greater demand from countries in the South Asian Association for Regional Cooperation (SAARC); and the entry of multinationals (MNCs), leading to opening up of new product segments and market expansion.

Growth in road development activity would be the single most important factor to move forward the Indian CV industry. There is a direct co-relation between road density and truck population, and India lags behind some of the other emerging market countries.

The Golden Quadrilateral (GQ) and the North South East West (NSEW) corridors are initiatives by the central government to build 16,000 kilometres of roads all over the country. They will be the major factor driving growth of CV sales in India. Other structural changes include the implementation of Bharat emission norms, which are accelerating the replacement of aged vehicles: Bharat Stage III is effective in all major cities and Bharat Stage II is effective in all other places from April one last year.

Also, many states are privatising passenger transport. Well positioned for global growth Indian CV majors are preparing themselves through acquisitions and joint ventures (JVs) for access to newer markets and technology.

UNI