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Asia on the Ground: India Comm. Vehicles
Channel checks suggest weaker H2 growth
„ Meeting with commercial vehicles industry participants
We met with dealers of all leading commercial vehicles manufacturers (Tata
Motors, Ashok Leyland, Eicher and M&M (SCVs only)) in the Mumbai region and
a couple of large transporters in Mumbai and Delhi. We also met with Mr.
Revankar, Dy. MD, Shriram Transport Finance, a leading truck financier.
„ Looking to understand on the ground competitive dynamics & outlook
Our objective was to understand dealers and transporters view on current demand
for commercial vehicles, industry trends and their outlook going forward. We were
looking to better understand near term growth drivers and issues. We also wanted
to get a sense of ‘on the ground’ competitive dynamics.
„ M&HCV growth to remain weak while LCV/SCVs outlook is strong
Our checks with dealers suggest MHCV demand is likely to remain flattish in the
near term, with a recovery potentially expected only from Dec’11. Transporters
indicate that freight rates have not grown, fleet utilization has dropped leading to
pressure on margins. Transporters remain in a ‘wait and watch’ mode and are not
looking to add any new trucks over the next 6 months. Finance availability is good
but rates have increased. LCVs have continued to grow well and outlook remains
strong (we raise our LCV vol. growth estimate to 23% YoY from 15% for FY12).
„ Maintain Sell on M&HCV players, Buy on M&M
We maintain a Sell on Tata Motors and Ashok Leyland. We maintain a Buy on
M&M due to its strong presence in the rural market through tractors and UVs and
presence in high growth LCV segment
Meeting with sector participants
Q We met with dealers of all leading commercial vehicles manufacturers (Tata
Motors, Ashok Leyland, Eicher and M&M (SCVs only)) around Mumbai to
understand the on the ground dynamics and trends in the market as well as
dealer outlook.
Q We also met leading transporter in Mumbai and Delhi to understand industry
dynamics from end customer point of view.
Q We also met leading used truck financier and originator of loans for new
trucks.
Detailed Findings
Dealer meeting Takeaways
Medium & Heavy Commercial Vehicle segment
Demand Trends
Growth is negative for the leading players – Tata Motors and Ashok Leyland.
Last couple of months have shown significant slowdown in demand. Eicher has
continued to grow well driven by significant improvement in market share in the
16T segment. Have captured a meaningful market share in the 16T tipper market.
The product offer better mileage than competitor models.
Tractor trailer the largest segment has been slow due to the turbulent conditions
in the export import market. Real estate and construction segments have also
slowed down.
Competitive Dynamics
Tata Motors continues to have about 50%+ share in the Mumbai M&HCV
market followed by Ashok Leyland with 30%+ share and Eicher with a 5%+
marketshare. However, Tata Motors seems to have been impacted by product
availability issues for certain products in recent months. Eicher has recently
entered new segments with launch of 40tn tractor trailer and 25 tn Tipper and is
expected to improve market share going forward.
Discounts continue to remain high as demand has been weak. While the level of
discounts vary across cos., however pricing for similar products across cos. is
similar as higher list price is typically matched by higher discounts.
Trends within customer segments
First time users (FTU’s) remain weak, higher interest rates are a significant
deterrent for the segment. FTU’s are a small portion of the market. Strategic
customers (large fleet operators, with more than 50 trucks) are not impacted.
However, margins are under pressure for all transporters given higher diesel
prices, limited availability of drivers, increase in truck prices and interest rates.
Replacement cycle
The replacement cycle for big fleet operators continues to remain around 5 years
inline with the financing period. For retail customers, it may be 7-8 years. There
has been no change in the same. However, currently, some slowdown in
replacement as transporters trying to negotiate with customers for higher prices
ahead of fleet replacement.
The demand for used Euro-2 vehicles is strong and prices are likely to increase.
Financing
Financing availability remains good although rates have risen. Interest rates are
around 12% for strategic customers to about 15% for FTU’s. LTV remains at
90%-95% for chassis. Most financiers are willing to lend, so no significant need
to rely on captive financiers. For Eicher LTV’s have improved for HCV’s over
the last couple of years as financier confidence on the resale value has improved.
Demand Outlook
Overall, dealers expect market demand to remain flattish YoY for the next 5-6
months. Some dealers expect recovery from around Nov/Dec’11, with some
potential support from OEM’s in form of higher discounts and some interest rate
subvention from financiers.
Dealers are relying on pickup in infrastructure and govt. spending to help drive
demand.
Light Commercial Vehicles/ Small Commercial
vehicles Segment
Q Dealers expect robust growth to continue in the LCV and SCV (GVW below
3.5 tonnes, Tata Ace, M&M Bolero pickup and Maxximo key products)
segment with growth in excess of 10%YoY. Growth continues to be largely
driven redistribution load demand coming from a wide variety of customers.
Q Tata Motors continues to dominate the LCV/ICV segment with 70% market
share with Eicher having the rest. In the SCV segment, Tata Motors again
has more than 50% market share driven by Tata Ace while M&M with 35%+
driven by Bolero pickup and Maxximo.
Q 50%-60% of the SCV market is driven by captive users and not transporters.
Q Ample financing available with NBFC’s being aggressive in this segment.
Sundaram in the LCV segment and Cholamandalam. L&T Finance etc in the
SCV space. SCV interest rates between 14%-18%, however LTV remains
above 90%.
Transporter Outlook
Key findings from our meeting with Delhi transporter: We met with a
large freight operator in Delhi operating more than 1,500 trucks. He primarily
caters to Auto industry (50%); the other 50% is from whitegoods, exports
(container) and open goods freight. He primarily operates as a long distance
carrier.
Q According to him, freight market has been weak since April'11 and weakness
has been experienced across all segments, not just autos. Freight volumes in
the market have declined by about 20%.
Q Fleet capacity utilization is down about 25%, in the 60%-80% range.
Q Freight rates have not moved up despite sharp increase in diesel prices as
there is a lot of competition in the market. It is only in the contracts with pass
through clauses that the transporter has been able to pass on diesel price hike.
Q According to him the industry is not witnessing overloading.
Q Outlook: He expects markets to remain weak till Dec'11 and doesn’t expect
recovery during the festive season. He doesn’t look to add new vehicles in
the next 6 mths unless they win any new contracts. He wants to remain in
wait & watch mode. He also expects used truck prices to strengthen as
people can generate similar cashflow with lower capital investment.
Key findings from our meeting with Mumbai transporter: We also met a
logistics player operating ~7000 (including own fleet). He primarily caters to the
export and import segment. According to him, while exports have seen a
slowdown, imports continue to be steady.
Q Demand especially from imports continues to be steady (referring to trade
carried on Nhava Sheva port). However, the most important factor
dampening their demand for trucks (bought ~150 trucks last year versus none
in the current year) is the shortage of availability of drivers especially for
long hauls.
Q Fleet utilization is ~60%; profitability will continue to be under pressure. His
contracts on spot basis constitute ~5% of the business and therefore it’s
difficult to pass through the rising cost of fuel. Industry is seeing increasing
entry of new players which want to capture market at lower rate (disruptive
competition).
Q He also believes that overloading is restricted especially interstate.
Q .Replacement cycle for him is around five years, equal to the loan term.
Q Outlook: He expects shipments to pickup after Diwali; doesn’t expect to add
new trucks to his fleet in next six months. He also expects used truck prices
to go up given increase in prices of new trucks.
Financier Outlook
We met with Mr. Umesh Revankar, Deputy Managing Director, Shriram
Transport Finance, a leading used truck financier and originator of loans for new
trucks.
Q Mr Revankar expects MHCV growth of 2-5% in H2FY12 driven by
slowdown in industrial activity. He believes if govt. acts proactively to boost
infrastructure spending the growth for FY12 may be around 10%.
Q The freight demand continues to be there, not really seeing any pockets of
weakness in any part of the country. However, freight rates have not moved
up and therefore transporter margins are under pressure. However, this has
not as yet impacted collections for EMI for the co.
Q There is no overloading as state govts. are very strict in implementation.
Q Expects LCV growth to be strong in the range of 20%-25%. It should
continue to grow at 2x-3x MHCV growth driven by strong rural demand.
Rural consumption will continue to remain strong driven by increasing rural
wealth, improving rural road connectivity and telecommunication.
UBS Outlook
We maintain our bearish outlook for MHCV growth in the near term due to
several headwinds including high interest costs and fuel costs. Transporters are
not expanding their fleet given declining profitability (freight rates have not
increased in tandem with rising costs). .
Our economist, Philip Wyatt, expects economy to slow further in H2FY12 given
the weak global backdrop and high interest rates. We believe recent mining ban
in Karnataka and slowdown in industrial activity will result in weak IIP growth
and CV demand. Growth in core sectors like steel and cement continues to be
very weak. Philip has reduced his forecast for FY12 industrial growth from
7.5% to 6.8%. We therefore continue to remain cautious on domestic MHCV
demand. We estimate 5%/12 % YoY growth in FY12/13.
We believe LCVs will witness strong growth (also supported by our discussion
with dealers) mainly due to rising consumption and better connectivity to the
hinterland that will give rise to hub & spoke distribution model. We raise our
estimate for LCV growth from 15% to 23% YoY in FY12 given stronger growth
and more positive outlook. We estimate 19% YoY growth in FY13.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia on the Ground: India Comm. Vehicles
Channel checks suggest weaker H2 growth
„ Meeting with commercial vehicles industry participants
We met with dealers of all leading commercial vehicles manufacturers (Tata
Motors, Ashok Leyland, Eicher and M&M (SCVs only)) in the Mumbai region and
a couple of large transporters in Mumbai and Delhi. We also met with Mr.
Revankar, Dy. MD, Shriram Transport Finance, a leading truck financier.
„ Looking to understand on the ground competitive dynamics & outlook
Our objective was to understand dealers and transporters view on current demand
for commercial vehicles, industry trends and their outlook going forward. We were
looking to better understand near term growth drivers and issues. We also wanted
to get a sense of ‘on the ground’ competitive dynamics.
„ M&HCV growth to remain weak while LCV/SCVs outlook is strong
Our checks with dealers suggest MHCV demand is likely to remain flattish in the
near term, with a recovery potentially expected only from Dec’11. Transporters
indicate that freight rates have not grown, fleet utilization has dropped leading to
pressure on margins. Transporters remain in a ‘wait and watch’ mode and are not
looking to add any new trucks over the next 6 months. Finance availability is good
but rates have increased. LCVs have continued to grow well and outlook remains
strong (we raise our LCV vol. growth estimate to 23% YoY from 15% for FY12).
„ Maintain Sell on M&HCV players, Buy on M&M
We maintain a Sell on Tata Motors and Ashok Leyland. We maintain a Buy on
M&M due to its strong presence in the rural market through tractors and UVs and
presence in high growth LCV segment
Meeting with sector participants
Q We met with dealers of all leading commercial vehicles manufacturers (Tata
Motors, Ashok Leyland, Eicher and M&M (SCVs only)) around Mumbai to
understand the on the ground dynamics and trends in the market as well as
dealer outlook.
Q We also met leading transporter in Mumbai and Delhi to understand industry
dynamics from end customer point of view.
Q We also met leading used truck financier and originator of loans for new
trucks.
Detailed Findings
Dealer meeting Takeaways
Medium & Heavy Commercial Vehicle segment
Demand Trends
Growth is negative for the leading players – Tata Motors and Ashok Leyland.
Last couple of months have shown significant slowdown in demand. Eicher has
continued to grow well driven by significant improvement in market share in the
16T segment. Have captured a meaningful market share in the 16T tipper market.
The product offer better mileage than competitor models.
Tractor trailer the largest segment has been slow due to the turbulent conditions
in the export import market. Real estate and construction segments have also
slowed down.
Competitive Dynamics
Tata Motors continues to have about 50%+ share in the Mumbai M&HCV
market followed by Ashok Leyland with 30%+ share and Eicher with a 5%+
marketshare. However, Tata Motors seems to have been impacted by product
availability issues for certain products in recent months. Eicher has recently
entered new segments with launch of 40tn tractor trailer and 25 tn Tipper and is
expected to improve market share going forward.
Discounts continue to remain high as demand has been weak. While the level of
discounts vary across cos., however pricing for similar products across cos. is
similar as higher list price is typically matched by higher discounts.
Trends within customer segments
First time users (FTU’s) remain weak, higher interest rates are a significant
deterrent for the segment. FTU’s are a small portion of the market. Strategic
customers (large fleet operators, with more than 50 trucks) are not impacted.
However, margins are under pressure for all transporters given higher diesel
prices, limited availability of drivers, increase in truck prices and interest rates.
Replacement cycle
The replacement cycle for big fleet operators continues to remain around 5 years
inline with the financing period. For retail customers, it may be 7-8 years. There
has been no change in the same. However, currently, some slowdown in
replacement as transporters trying to negotiate with customers for higher prices
ahead of fleet replacement.
The demand for used Euro-2 vehicles is strong and prices are likely to increase.
Financing
Financing availability remains good although rates have risen. Interest rates are
around 12% for strategic customers to about 15% for FTU’s. LTV remains at
90%-95% for chassis. Most financiers are willing to lend, so no significant need
to rely on captive financiers. For Eicher LTV’s have improved for HCV’s over
the last couple of years as financier confidence on the resale value has improved.
Demand Outlook
Overall, dealers expect market demand to remain flattish YoY for the next 5-6
months. Some dealers expect recovery from around Nov/Dec’11, with some
potential support from OEM’s in form of higher discounts and some interest rate
subvention from financiers.
Dealers are relying on pickup in infrastructure and govt. spending to help drive
demand.
Light Commercial Vehicles/ Small Commercial
vehicles Segment
Q Dealers expect robust growth to continue in the LCV and SCV (GVW below
3.5 tonnes, Tata Ace, M&M Bolero pickup and Maxximo key products)
segment with growth in excess of 10%YoY. Growth continues to be largely
driven redistribution load demand coming from a wide variety of customers.
Q Tata Motors continues to dominate the LCV/ICV segment with 70% market
share with Eicher having the rest. In the SCV segment, Tata Motors again
has more than 50% market share driven by Tata Ace while M&M with 35%+
driven by Bolero pickup and Maxximo.
Q 50%-60% of the SCV market is driven by captive users and not transporters.
Q Ample financing available with NBFC’s being aggressive in this segment.
Sundaram in the LCV segment and Cholamandalam. L&T Finance etc in the
SCV space. SCV interest rates between 14%-18%, however LTV remains
above 90%.
Transporter Outlook
Key findings from our meeting with Delhi transporter: We met with a
large freight operator in Delhi operating more than 1,500 trucks. He primarily
caters to Auto industry (50%); the other 50% is from whitegoods, exports
(container) and open goods freight. He primarily operates as a long distance
carrier.
Q According to him, freight market has been weak since April'11 and weakness
has been experienced across all segments, not just autos. Freight volumes in
the market have declined by about 20%.
Q Fleet capacity utilization is down about 25%, in the 60%-80% range.
Q Freight rates have not moved up despite sharp increase in diesel prices as
there is a lot of competition in the market. It is only in the contracts with pass
through clauses that the transporter has been able to pass on diesel price hike.
Q According to him the industry is not witnessing overloading.
Q Outlook: He expects markets to remain weak till Dec'11 and doesn’t expect
recovery during the festive season. He doesn’t look to add new vehicles in
the next 6 mths unless they win any new contracts. He wants to remain in
wait & watch mode. He also expects used truck prices to strengthen as
people can generate similar cashflow with lower capital investment.
Key findings from our meeting with Mumbai transporter: We also met a
logistics player operating ~7000 (including own fleet). He primarily caters to the
export and import segment. According to him, while exports have seen a
slowdown, imports continue to be steady.
Q Demand especially from imports continues to be steady (referring to trade
carried on Nhava Sheva port). However, the most important factor
dampening their demand for trucks (bought ~150 trucks last year versus none
in the current year) is the shortage of availability of drivers especially for
long hauls.
Q Fleet utilization is ~60%; profitability will continue to be under pressure. His
contracts on spot basis constitute ~5% of the business and therefore it’s
difficult to pass through the rising cost of fuel. Industry is seeing increasing
entry of new players which want to capture market at lower rate (disruptive
competition).
Q He also believes that overloading is restricted especially interstate.
Q .Replacement cycle for him is around five years, equal to the loan term.
Q Outlook: He expects shipments to pickup after Diwali; doesn’t expect to add
new trucks to his fleet in next six months. He also expects used truck prices
to go up given increase in prices of new trucks.
Financier Outlook
We met with Mr. Umesh Revankar, Deputy Managing Director, Shriram
Transport Finance, a leading used truck financier and originator of loans for new
trucks.
Q Mr Revankar expects MHCV growth of 2-5% in H2FY12 driven by
slowdown in industrial activity. He believes if govt. acts proactively to boost
infrastructure spending the growth for FY12 may be around 10%.
Q The freight demand continues to be there, not really seeing any pockets of
weakness in any part of the country. However, freight rates have not moved
up and therefore transporter margins are under pressure. However, this has
not as yet impacted collections for EMI for the co.
Q There is no overloading as state govts. are very strict in implementation.
Q Expects LCV growth to be strong in the range of 20%-25%. It should
continue to grow at 2x-3x MHCV growth driven by strong rural demand.
Rural consumption will continue to remain strong driven by increasing rural
wealth, improving rural road connectivity and telecommunication.
UBS Outlook
We maintain our bearish outlook for MHCV growth in the near term due to
several headwinds including high interest costs and fuel costs. Transporters are
not expanding their fleet given declining profitability (freight rates have not
increased in tandem with rising costs). .
Our economist, Philip Wyatt, expects economy to slow further in H2FY12 given
the weak global backdrop and high interest rates. We believe recent mining ban
in Karnataka and slowdown in industrial activity will result in weak IIP growth
and CV demand. Growth in core sectors like steel and cement continues to be
very weak. Philip has reduced his forecast for FY12 industrial growth from
7.5% to 6.8%. We therefore continue to remain cautious on domestic MHCV
demand. We estimate 5%/12 % YoY growth in FY12/13.
We believe LCVs will witness strong growth (also supported by our discussion
with dealers) mainly due to rising consumption and better connectivity to the
hinterland that will give rise to hub & spoke distribution model. We raise our
estimate for LCV growth from 15% to 23% YoY in FY12 given stronger growth
and more positive outlook. We estimate 19% YoY growth in FY13.
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