Risk analysis of Commercial Vehicle Industry Background: The CV industry accounts for more than 60-65 per cent

of the total freight handled in the country !s transportation in"ol"es e"ery sector of the economy# the performance of the CV market mirrors the o"erall performance of the economy $ingle truck operators %up to fi"e trucks& dominate the transportation sector The CV industry is cyclical in nature# as demand is dri"en 'y a num'er of factors such as gro(th in industrial and agricultural production# gro(th in freight mo"ement# share of road in freight mo"ement# changes in freight rates and fuel prices# profita'ility of truck operators and state transport undertakings %$T)s&# and go"ernment policies Risk !nalysis of Commercial Vehicle Industry Industry Risk *arameters +emand-supply ,istorically# the CV industry has 'een cyclical# and the sales cycle has 'roadly follo(ed the industrial gro(th cycle !fter the persistent decline in sales in -000-0. %.- per cent& and -00.-0- %/ per cent&# the demand for CVs reco"ered su'stantially# recording a C!0R of o"er -0 per cent for the past / years !lthough the industry continues to remain cyclical# the gro(th in demand is likely to 'e assisted 'y partial decoupling of sales from industrial and economic gro(th# due to an increase in demand of small commercial "ehicles# rise in sale of tippers and gro(th in e1ports# accompanied 'y a structural shift %the $upreme Court2s 'an on o"erloading& In -006-03# the 4CV segment gre( 'y around 5. per cent# dri"en 'y gro(th in tonnage redistri'ution demand and su'stitution of large three-(heelers 'y the su'one tonne segment The 6,CV segment gre( 'y around 55 per cent on the 'ack of a lo(er 'ase %on account of the una"aila'ility of critical components& in the corresponding period of the pre"ious year# propelled 'y the positi"e impact of the $upreme Court2s order 'anning o"erloading of "ehicles o"er the prescri'ed limit# sustained II* gro(th# increased construction and mining acti"ities# and gro(ing foreign trade 'oosting port traffic 4CV demand is e1pected to gro( 'y .5-.6 per cent in -003-07 %despite a higher 'ase in -006-03&# (hile 6,CV demand is e1pected to (itness a singledigit gro(th of . 5-- 0 per cent in -003-07# mainly on account of a higher 'ase in -006-03# due to the one-time demand# follo(ing the $upreme Court2s order ,o(e"er# the key monitora'le is the rising interest rates# (hich could slo( do(n economic gro(th and consumption demand# there'y leading to a slo( do(n in CV sales 0o"ernment policies Currently# the e1cise duty on CVs stands at .6 5 per cent The reduction in the peak customs duty on imported components to .0 per cent in )nion Budget -003-07 (ill not ha"e a ma8or impact on the industry# gi"en a "ery high degree of indigenisation %o"er 95 per cent& ,o(e"er# it (ill yield marginal sa"ings in the component costs of 'uses that use imported engines The scrapping of "ehicles that are o"er .5 years old in the :ational Capital Region %:CR& and o"er 7 years old in 6um'ai# and the introduction of compressed natural gas %C:0& 'uses in certain states ha"e had a fa"oura'le impact more so on passenger CV sales in recent months ,o(e"er# this scheme has not 'een implemented at the national le"el; if implemented# there could 'e a significant impact on CV sales In a significant 8udgment on :o"em'er 9# -005# the $upreme Court ruled that the issuance of gold cards<tokens under notifications 'y nine state go"ernments# allo(ing o"erloading of trucks in e1cess of the prescri'ed (eight limit after payment of fi1ed charges# (as in "iolation of certain acts ! part of this impact has 'een a'sor'ed 'y the shift of some specific commodities to rail; the remaining already got translated into a one-time additional demand for CVs in -006-03 ,o(e"er# the stringency in implementing the (eight norms has reportedly reduced in -003-07# resulting in increased pre"alence of o"erloading

Input-related risk Ra( materials and components# (hich account for 35-35 per cent of the net sales of CV manufacturers# are easily a"aila'le in India# due to the presence of a de"eloped and highly competiti"e auto ancillary industry !lmost all players ha"e increased their indigenisation le"els to o"er 95 per cent o"er the last fe( years Thus# import costs do not ha"e a ma8or role in the increase in ra( material costs or total costs of the industry The a"erage annual price of steel rose 'y .9 per cent %y-o-y& in -006-03 !lso# prices of other inputs such as ru''er# plastic and aluminium ha"e gone up !s a result# the proportion of ra( materials to sales has increased as compared (ith the years earlier In the short-to-medium term# steel prices are likely to remain firm at current le"els# resulting in sta'le input costs =1tent of competition 6oderate competition e1ists in the CV industry# due to the limited num'er of players Currently# there are si1 players in the 6,CV segment > Tata 6otors# !shok 4eyland# =icher 6otors# $(ara8 6a?da# Tatra )dyog and Vol"o India > and eight players in the 4CV segment > Tata 6otors# !shok 4eyland# $(ara8 6a?da# =icher 6otors# 6ahindra and 6ahindra# ,industan 6otors# *iaggio 0rea"es Vehicles 4td and @orce 6otors Tata 6otors and !shok 4eyland account for 35-33 per cent of the industry "olume# and this scenario is likely to continue in the near term ,o(e"er# players such as Ba8a8 !uto and ,industan 6otors are eyeing the su'-one tonne segment %(here Tata !ce# 6/ and the recently launched *iaggio !pe are present& 6oreo"er# e1isting players# in colla'oration (ith a foreign partner such as @orce 6otors (ith 6!: !0# 6ahindra and 6ahindra (ith )$ IT=C# Vol"o (ith =icher and +aimler (ith ,ero group are planning to enter the duopolistic 6,CV market In fact# 6!:-@orce AV has already started selling "ehicles in this segment Bith more and more such players e1pected to start commercial production in the short-to-medium term# competition is likely to intensify in the CV industry ,o(e"er# since their capacities are not e1pected to 'e 'uilt in the near future# they are unlikely to capture a significant market share in the short term 0lo'al players such as Vol"o# +aimler Chrysler and Tatra# (ho are looking at the domestic market# ha"e restricted themsel"es to the higher tonnage segment and are unlikely to offer any significant competition to e1isting players in the medium term Company-(ise risk profiling: Tata 6otors