The Hindu Business Line : Commercial vehicles — Powered by highest sales, exports

Powered by an improved road network and attractive finance, the commercial vehicles segment is all set to sustain the scorching pace of growth provided the economy-managers make the right Budget moves.

IN all the din and hype over the achievement of the passenger car industry in crossing sales of a million vehicles in 2003-04, the commercial vehicles (CV) industry, which has achieved a major landmark of its own, has been all but forgotten.

The last fiscal saw the highest ever sales of CVs in the country at 2.6 lakh vehicles, a full 10 per cent more than the best ever year till now, 1996-97. Fiscal 2003-04 was also the best year for CV exports, which crossed 17,000 units.

Mr R. Seshasayee, Managing Director, Ashok Leyland, says it is remarkable that that the quality of growth in 2003-04 was much superior than in 1996-97. What he means is that the underpinnings of the growth impetus were more durable and reliable as they rested on stronger economic fundamentals.

Growth drivers

What were the growth drivers? First is the ongoing investment in developing the road infrastructure of the country, notably the Golden Quadrilateral project and the North/South and East/West corridors.

While the demand for high-speed, large-capacity, long-haul vehicles will follow, the immediate demand has been for vehicles used in construction, such as tippers, dumpers and other medium-sized vehicles. This is borne out by the segmental growth figures; sales of tippers, used mainly in construction, grew 43 per cent during 2003-04.

Second, the continuing low interest rate regime that has made EMIs (equated monthly instalments) attractive for the larger sized trucks. Notably, EMIs have for the first time, been packaged and marketed attractively by the finance companies, especially in the smaller towns and cities. This has resulted in a broad-basing of truck ownership with several first-time buyers entering the market.

Contrary to general perceptions about the direction of growth, CV sales last year witnessed healthy demand in the entry segment of 16 tonnes, which boasts of the tried and tested, double-axle goods haulage vehicles. This is probably driven by the entry of new operators into the fleet market who usually start with one or two trucks of their own.

The third growth driver last year was the increased awareness of the perils of aged vehicles on roads, with some State governments proactively banning them and others, acting on Court orders, doing the same. For instance, vehicles over 15 years old are prohibited from entering the city of Mumbai following Court orders. Kolkata has a similar stipulation.

Future perfect

The scorching growth of 37 per cent in 2003-04 has been followed up with impressive sales in the first two months of the fiscal. The two major players, Tata Motors and Ashok Leyland, have reported exceptional growth of 58 per cent each in the first two months put together. These numbers are contrary to the general trend of soft sales in the first quarter even in a period of high growth for the industry.

Of course, these growth rates cannot be sustained over the full year but it certainly does appear that the industry is set for yet another boom year in the current fiscal. This is predicated on certain critical assumptions though. The first is that the ongoing road construction projects will continue under the new government at the same pace.

Second, that the monsoon this year will behave as per prediction and turn out to be good. Initial reports of precipitation are encouraging with some of the areas that lost out last year reporting good rainfall at the start of the season this time round.

Third, that the Union Budget to be presented shortly does not contain any drastic proposals such as a hike in corporate taxation that could affect overall sentiment. Business sentiment is a fickle thing and all it needs is a wrong move from the managers of the economy to set it back. Companies are now busy planning investments in expansions and this will be the wrong time to review corporate taxation policies.

Finally, the pace of growth will depend on how well Tata Motors and Ashok Leyland are able to manage their capacities.

The latter was hobbled last year by its own capacity constraints as also the inability of component suppliers to scale up their own production.

In fact, this is a critical factor that could dictate the growth momentum for the CV industry as some component manufacturers have been caught on the wrong foot by the sharp rise in demand and have to invest in new capacities.

After a long time, the CV industry has hit a purple patch and a lot of excitement is in store with new generation models to be launched by the two major players that are likely to change the face of the truck industry in the country. Granted, of course, that the growth is sustained over the next year or two.

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Commercial vehicles — Powered by highest sales, exports