Higher Rates Fail To Dent Demand For Trucks But Risks Loom

India’s commercial vehicle industry has had a good year with sales surpassing the pre-pandemic period, but that recovery is threatened by looming risks of recession, higher borrowing rates and consumption slowdown.

The impact of higher interest rates is yet to affect the demand for trucks as enquiry levels and freight rates remain steady, according to the industry participants.

“Demand for commercial vehicles is driven by a combination of factors including replacement cycle and the overall economic activity, and higher interest rates can be justified if those remain strong,” Vineet Agarwal, immediate past president of industry body Assocham, told BQ Prime.

''Since fleet operators couldn’t replace their older vehicles due to the pandemic, they are doing that now, driving demand for these load carriers,'' he said.

Yet, the industry is staring at headwinds. The Reserve Bank of India raised the benchmark repo rate to 6.25% last week to bring down inflation. The higher prices of goods and services are threatening to curb consumption with certain product categories already witnessing impact on sales.

So far, despite the higher costs of financing, the sales of trucks and buses have remained resilient this year with industry sales rising over 46% year-on-year to 5.71 lakh units in April-November, according to the data compiled from the Federation of Automobile Dealers Associations. The sales have surpassed the pre-pandemic figures for the same period by 3.25%.

“Enquiry levels are good and inventory financing is not an issue right now,” Sharvik Shah, director of Rajesh Motors, a Rajasthan-based dealer of Ashok Leyland, said.

But the recovery in CV demand, after two difficult years, has not been similar across categories. While the sales of light commercial vehicles grew just 0.9% in April-November compared with 2019, the medium and heavy commercial vehicle sales rose 5.5%.

“Due to high inflation impact on consumption, the sales of smaller commercial vehicles is under pressure,” Hemal N Thakkar, director of Crisil Market Intelligence & Analytics, said.

The government's investment on infrastructure development and improved economic activity after the pandemic are driving sales in the medium and heavy vehicles categories.

The small fleet operators have relatively lower capability to pass-on escalated costs to customers when compared with their bigger counterparts, while their credit profile is also weaker, Thakkar said.

Higher interest rates have already started to pinch the smaller fleet operators, he said.

For a fleet operator depending heavily on the cross-border trade, it makes little sense to expand capacity amid a looming recession, said Nikunj Goyal, director at Geete Carriers Pvt, a Mumbai-based logistics company.

According to a report by Emkay Global, Volvo, Daimler, Paccar and Americas Commercial Transportation expect 2023 to be "flat or lower" in both North America and Europe because of weakening freight demand and rates, higher interest rates and weak macros, lower profitability of transporters on sluggish demand-supply dynamics.

This downturn is predicted to persist in CY24 in North America, with a 13% drop in production due to change in emission norms, the report added. However, it predicts that India’s MHCV segment is likely to grow strongly by 14% in CY23.

But many industry participants have reasons to remain cautious.

From a global trade perspective, the future doesn’t seem to be very strong as medium and heavy commercial categories could get impacted from the recession in western countries, Crisil’s Thakkar said. However, it will be critical how the credit profile of smaller operators shapes up in the coming months, he added.

Vineet Agarwal, who is also the managing director of logistics company Transport Corporation of India Ltd. said, while the company will go ahead with its plan to augment its truck capacity, the impact of higher interest rates may slow down CV sales in the coming months.

It will be easier to tide over these challenges if the government persists with its focus on infrastructure development. But the unpredictability of Ukraine-Russia war, China’s zero-Covid policy and potential recession in the developed world is keeping the industry watchers on their toes.