CV industry outlook revised by ICRA; expects 0-3% growth in FY25

CV industry outlook by ICRA: The forecast for the commercial vehicle (CV) industry's domestic wholesale volumes has been revised by ICRA. ICRA has anticipated a slight growth of 0-3 per cent on a year-on-year basis for FY25 instead of the previously expected decline of 4-7 per cent. This revision by ICRA comes after the volume growth in the first four months of FY25 and an expected increase in demand in the second half of the fiscal year. FY25 is expected to be the second consecutive year of modest growth, following a 1 per cent and 3 per cent year-on-year increase in wholesale and retail sales, respectively, in FY24.

Kinjal Shah, Senior Vice President & Co-Group Head – Corporate Ratings, ICRA, has explained the factors influencing the CV market dynamics. She said, "A range of factors such as the slowdown in infrastructure activities during the General Elections, as well as extreme heatwaves across the country, had some bearing on demand in Q1 FY25. However, volumes in this period exceeded ICRA’s expectations. Looking ahead, ICRA expects a recovery in volumes in H2 FY25 aided by a back-ended Government capex, some pick-up in private capex across manufacturing sectors, and an improvement in rural demand, following visibility around the Kharif crop output and farm cash flows.  The replacement demand would also remain healthy (primarily due to the ageing fleet) and is expected to support the industry volumes in the medium term.”

Shah has also pointed out the ongoing positive factors for the commercial vehicle industry. "The long-term growth drivers for the domestic CV industry remain intact, like the sustained push in infrastructure development (evidenced by retaining the higher infrastructure capital outlay in the July 2024 budgetary allocation), a steady increase in mining activities, and the improvement in roads/highway connectivity,” Shah said.

Medium & Heavy commercial vehicles to mark a negligible growth in FY25:

There are various sub-segments in the CV industry. The medium and heavy commercial vehicles (M&HCV) (trucks) volumes in FY2025 are expected to show a negligible growth of 0-3 per cent on a year-on-year basis. This forecast accounts for the high base effect and the impact of the General Elections on infrastructure activity in the first few months of the fiscal year. The segment has witnessed FY2024 with essentially flat volumes. Within this sub-segment, tipper trucks have experienced a 4 per cent decline on a year-on-year basis in Q1 FY25, while the haulage sub-segment showed a fair 3 per cent year-on-year growth for the same period. The tractor-trailers segment have registered a decent 7 per cent year-on-year volume growth in Q1 FY25.

Light commercial vehicle to observe minor growth

In the domestic light commercial vehicles segment, the expected year-on-year growth in wholesale volumes ranges from a negative 1 per cent to a positive 2 per cent in FY2025. This neutral growth is due to factors such as a strong base effect, a long slowdown in e-commerce, and competition from electric three-wheelers. In FY24, this segment saw a decline of 3 per cent on a year-on-year basis due to these factors. The increased total cost of ownership for LCVs has also resulted in a rising selection for pre-owned vehicles among small fleet operators.

Good growth expected in the bus segment:

The bus segment is expected to see a growth of 8-11 per cent on a year-on-year basis in FY25. This growth is driven by the replacement demand from the scrappage of older government vehicles by state road transport undertakings (SRTUs). Regarding the powertrain mix, conventional fuels, primarily diesel engine powertrains, continue to dominate in the domestic CV industry. The diesel engine has over 90 per cent penetration. In FY2024, alternative fuels (CNG, LNG, and electric) accounted for about 9 per cent of sales. The bus segment has the largest penetration of electric vehicles at 7 per cent, which is followed by LCV goods at 1 per cent. The credit goes to the FAME-II subsidies.

Operating profit margin of manufacturers:

ICRA has projected the operating profit margin of the domestic commercial vehicle industry for the original equipment manufacturers to be in the range of 9.5 per cent to 10.5 per cent in FY2025. This is due to lower volumes and increased competitive pricing pressures, however, cost improvements, lower raw material costs, and better product discipline will bring some relief. The OPM for FY24 had improved by almost 300 basis points to 10.7 per cent, which is supported by operating leverage benefits. The industry is estimated to see an increase in capex and investments of roughly Rs 56-58 billion in FY25, up from around Rs 34 billion in FY24.

These investments will focus mostly on product development. The major development will be in alternate powertrains, technology upgrades, and maintenance activities. ]Shah’s insights and predictions have reflected a detailed analysis of the domestic commercial vehicle market. It has highlighted both challenges and possible growth areas in the upcoming fiscal year.