ICRA Rating Feature

INDIAN COMMERCIAL VEHICLE INDUSTRY: Trends &

Outlook
Contacts:
Anjan Ghosh aghosh@icraindia.com +91-22- 3047 0006 Subrata Ray subrata@icraindia.com +91 22 3047 0027 Shamsher Dewan shamsherd@icraindia.com +91-124-4545 328
Website www.icra.in

Summary
The strong recovery witnessed in the domestic commercial vehicle (CV) sector in the second half of the financial year 2009-10 (FY2010) has continued in the current fiscal with the April-November 2010 period reporting a growth of 35.2% over the corresponding previous year. Steady growth in economic activity, pick-up in demand from across end-user segments, adequate availability of financing at competitive rates, and improvement in the overall sentiment are among the key factors that have collectively aided the growth across the segments of the CV industry. Part of the growth has also been facilitated by pre-buying, a phenomenon witnessed during September 2010, ahead of changes in emission norms taking effect from October 1, 2010. Overall, the growth in the medium and heavy commercial vehicle (M&HCV) segment has been stronger at 47.4% as compared with the light commercial vehicle (LCV) segment, which reported a 25.8% growth during the same period. Within the M&HCV segment, the tractor-trailer segment was the first to witness recovery with increasing demand for transportation of industrial commodities and pick-up in foreign trade, while the tipper segment, which derives demand from the construction and infrastructure projects, witnessed a more gradual recovery. Over the past three to four quarters, original equipment manufacturers (OEMs) have effected successive price increases averaging over 10% to recover the increase in input material prices and the cost of making the transition from BS II to BS III emission norms. While economic activity remains buoyant and freight rates firm, the increase in ownership cost along with rising interest rates and fuel prices is likely to exert some pressure on the viability and cash flows of fleet operators. With growth in the CV segment during Q2 FY2011 having been driven partly by pre-buying ahead of BS III, ICRA expects growth in the second half (H2) of FY2011 to be relatively subdued.

January 2011

ICRA Rating Feature

Indian Commercial Vehicle Industry: An Update

In terms of competition, while in the past, international OEMs were unable to make a major dent in the domestic CV market (characterised by a duopolistic structure), they have now ventured in through joint ventures (JVs) with some of the domestic players, thereby raising the prospects of increasing competitive intensity. Examples of such JVs include the ones between Mahindra and Mahindra and Navistar; Eicher Motors and Volvo; Force Motors and MAN; and Ashok Leyland1 and Nissan. Some of the JVs are likely to benefit from the in-depth understanding of the domestic market that the local players have, their established vendor base, and their extensive marketing and distribution reach. Nevertheless, the incumbents, in defending their market position, would continue to draw strength from their established brand franchise, extensive service and distribution network, and competitive cost structures.

Industrial upturn and improved financing environment driving growth in CV segment

Barring some blip during the last few months, the key indicator of the underlying demand in the CV industry, the index of industrial production (IIP), has been improving steadily over the last two quarters, following strong revival in industrial activity. ICRAs channel check suggests that much of the growth in the CV segment has been driven by stronger economic activity and improvement in the operating environment for fleet operators, which has benefited from higher freight availability, firm freight rates, and relatively lower financing rates. The upsurge in M&HCV volumes has been supported by replacement demand originating mostly from large fleet operators. Within the M&HCV segment, demand for HCVs, particularly tractor trailers, has been strong, reflecting improving demand from container applications, and the steel, cement, and construction industries.
Chart 1: Trend in M&HCV volumes map IIP growth
270%
220%

Trend in M&HCV Sales and IIP Growth (%)

20%
17%

170%
120%

14%
11%

70% 20%
Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10
-30%

8% 5%
2%

-80%

-1%

M&HCV Growth (%)

IIP Growth (%) - RHS

Source: MOSPI, SIAM, ICRAs research

During the last four years (i.e. FY2007-10), the domestic CV industry has grown a modest CAGR of 4.3% largely reflecting the sharp downturn witnessed in FY2009. The recovery witnessed in FY2010 helped the industry report strong growth in FY2010 benefitting from the low-base of FY2009. During the current fiscal, the domestic CV industry has continued its strong growth momentum, reporting a growth of 35.2% between April-November 2010 over the corresponding period in the previous year. The CV industry in India, as is the trend internationally, is cyclical, with periods of volume growth leading to overinvestments in fleet capacity and subsequently to periods of correction.

Ashok Leylands JV with Nissan is focused on the LCV segment

ICRA Rating Feature Chart 2: Trend in domestic M&HCV & LCV Volumes
Trend in Domestic M&HCV Sales
300,000 250,000 200,000 150,000 100,000 50,000 33% 0% -33%
207,472 275,556 274,582 245,058 132,300
34%

Indian Commercial Vehicle Industry: An Update

Trend in Domestic LCV Sales

60% 40% 20% 0% -20% -40% 350,000 300,000 250,000 200,000 150,000 100,000 50,000 43% 34% 12% -7%
143,569 192,209 286,337 172,518

47%
194,958

26%
217,031

FY06 FY07 FY08 FY09 FY10 YTD YTD FY10 FY11 M&HCV Volumes Growth (%)

FY06 FY07 FY08 FY09 FY10 YTD YTD FY10 FY11 LCV Volumes Growth (%)

Source: SIAM Data, ICRAs estimates; YTD Figures April-November 2010

Demand likely to remain strong in heavy duty and small commercial vehicles segment
With the countrys highway infrastructure improving and the hub-and-spoke model gaining increasing acceptance, the domestic truck industry is witnessing polarisation, with growth in the HCV and Small Commercial Vehicle (SCV) segments outperforming the overall industry growth rate. Within the M&HCV segment, the share of heavy-duty, long-haulage trucks is witnessing a steady increase in proportion to the total M&HCV volumes, while in the LCV segment, SCVs are accounting for most of the volumes. In terms of cyclicality, the MCV segment is comparatively less affected by industrial slowdowns as these are primarily used for transportation of agriculture produce, consumer durables, and some bulky commodities (like construction material) compared to HCVs, which cater more to the industrial segment. Within the M&HCV segment, the demand for tractor trailers has been strong, reflecting the improving demand from container applications, and the steel, cement, and construction industries. The tipper segment within the HCV segment has also benefited from the gradual recovery in demand from construction and mining activities over the past few quarters. In LCVs, the share of the sub-3.5T (primarily sub-1T segment) segment has also been increasing since following the increasing acceptance of the hub-and-spoke model of transportation and the restrictions being placed on the movement of heavy trucks in some major cities. The sub-3.5T segment has been able to increase its share of LCVs consistently from 50% in FY2004 to close to 85% in FY2010. Some factors that have contributed to the success of the sub-3.5T segment are the adoption of the hub-and-spoke model, increased penetration of modern retail even in rural and Tier 2 and 3 cities, and substitution of three-wheelers (3Ws) by SCVs. Collectively, the size of the sub-3.5T LCVs and 3W goods carriers market has expanded from 56,000 units in FY2002 to over 300,000 units in FY2010, a CAGR of 23.4%. However, within this, the mix of SCVs and 3W has changed from 25:75 in FY2002 to 70:30 in FY2010, underscoring the preference for four-wheeled transportation. Given the strong performance recorded by the sub 3.5T segment owing to its better performance against cargo three-wheelers, several OEMs such as Bajaj Auto, ALL (through tie-up with Nissan) and General Motors (through tie-up with SAIC) have unveiled plans to produce LCVs in this range. Piaggio, Force Motors and M&M, meanwhile have already entered the segment. As a result, this segment is likely to get crowded and witness increase in competitive pressures as some of these players would benefit from their existing vendor base, distribution and service network.

CVs continue to be preferred despite cost competitiveness of railways

The competition posed by the Railways to long-haul HCVs remains formidable, and the share of the railways in the total freight transportation has increased over the last few years. Traditionally, roads have been preferred for the transportation of non-bulk commodities like cement, finished steel, and food grains, while the railways have been favoured for moving bulk commodities like coal, iron ore, and

ICRA Rating Services

215,912

50% 40% 30% 20% 10% 0% -10%

183,495

200,699

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ICRA Rating Feature

Indian Commercial Vehicle Industry: An Update

fertilizers. For long-haul transportation, the rail option is a less expensive than road transportation. However, even with the high cost differential, road transport has a higher share of the overall traffic, and this is mainly because of the advantages of last-mile connectivity, flexibility, and on-time service offered by road transporters, who too have gained (from shorter vehicle turnaround time) from the countrys improving highway network.

Some of the long-term drivers for the industry also remain favourable:
(a) The share of roads in total freight transportation has increased over the years following the construction of new highways that have reduced the vehicle turnaround time. While competition from the railways, especially for the transportation of commodities, has increased over the last few years, overall, CVs continues to offer more convenient service in many routes. (b) With substantial investments being made in the power sector, the demand for coal mining is likely to remain strong, facilitating demand for high-end tippers. (c) The demand for new trucks is likely to be replacement-led considering the fact that 30% of the total truck fleet at present is estimated to be over 12 years old. With the regulatory pressure on banning trucks older than 15 years increasing, replacement demand is likely to pick up. (d) The CV replacement cycle is becoming shorter following the launch of technologically advanced vehicles (that offer higher mileage and reliability).

Competitive pressures likely to increase in the CV sector

With the Indian CV industry attaining a meaningful size and showing potential for stronger long to medium term growth, competitive pressures in the industry are likely to increase, especially given the entry of several international OEMs in the Indian market. While in the past, international OEMs had not been able to make a serious dent in the Indian market, characterised by a duopolistic structure, ICRA expects the competitive pressures in the domestic CV sector to increase over the medium term. Currently, the international OEMs are following a two-pronged strategy in the emerging markets: (a) adapting premium products for local-markets and (b) entering the low-cost segment through local engineering, sourcing, and production. In India, most of the international players have forged alliances with local partners through JVs so as to gain a deeper understanding of the market here and come up with products that meet local requirements. The JVs are benefiting from the strong product, technology and design capabilities of the foreign partner, and from the in-depth understanding of the local market of the Indian collaborator. The presence of local partners is also likely to help the JVs leverage the existing distribution and service network of the Indian entities and their supplier base (for sourcing components). However, ICRA believes, the established players, in defending their market position, would continue to draw significant strength from their established brand franchise, extensive distribution network, and competitive cost structures.
Table 1: Trend in market share in the domestic M&HCV Segment FY06 FY07 FY08 FY09 M&HCV Segment Tata Motors 62.0% 62.9% 60.5% 61.9% Ashok Leyland 27.0% 27.9% 27.5% 25.7% Eicher Motors 7.4% 6.8% 8.2% 7.4% Other Players 3.5% 2.4% 3.9% 5.0% Source: SIAM Data, ICRAs estimates Table 2: Trend in market share in the domestic LCV Segment FY06 FY07 FY08 LCV Segment Tata Motors 60.1% 65.4% 62.1% M&M 26.1% 24.3% 25.6% Force Motors 5.0% 3.8% 5.0% Other Players 8.8% 6.5% 7.2% Source: SIAM Data, ICRAs estimates ICRA Rating Services

FY10 63.3% 23.3% 8.6% 4.7%

YTD FY10 64.9% 21.2% 8.9% 5.0%

YTD FY11 60.1% 25.5% 9.3% 5.15

FY09 59.9% 27.8% 3.9% 8.4%

FY10 58.5% 30.0% 4.0% 7.5%

YTD FY10 60.5% 28.2% 3.6% 7.8%

YTD FY11 56.0% 32.7% 4.8% 6.5%

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ICRA Rating Feature

Indian Commercial Vehicle Industry: An Update

Key Extracts from channel check CV Dealers

Pre-buying ahead of emission norm changes supported demand during Q2 FY2011 The CV market is currently in the transition phase from BS II to BS III system; OEMs are in the process of ramping up production of BS III vehicles; inventory levels in the channel are quite low at present Fleet operators are in the wait-and-watch mode; apprehensive about the performance of new engines Successive price increases effected by OEMs to pass on the increases in raw material prices and the cost of compliance with the new emission norms have increased vehicle ownership costs significantly, thereby impacting operator viability; price increase on account of emission norm changes is around 5-8% Overall CV sales are likely to remain low in Q3FY11; expected to pick-up from Q4FY11 onwards

CV Financiers
Interest rates for CV financing have marginally increased (i.e. 25 -50 bps) in the recent period on account of implementation of base rates and overall increase in interest rates With private sector banks increasing their presence in CV financing, competition is likely to keep a check on rate increases to an extent Approach towards lending norms (i.e. LTVs, tenure, customer filtration) however remains rational Disbursal levels are increasing steadily in tune with the underlying growth; delinquency levels have declined sharply LTV ratios remain (in favour of customers) above 95%+ for large fleet operators with a credible track record and at 75-80% for the industry as a whole Rise in vehicle ownership cost, increase in fuel cost, and possible weakening of freight rates (on account of capacity buildup) remain key concerns

CV Fleet Operators
Large organized fleet operators have been adding capacity, citing strong demand across sectors Despite rising interest rates, cost of financing remains quite favourable (below 10%) for some of the large operators with an established track record; LTV ratio close to 100% for these operators Trend in freight rates has largely been a mixed one; driven mainly by demand-supply mismatch in markets; fluctuation in freight rates and diesel prices are largely passed on to the market Absence of quality infrastructure/highways continue to impact viability of high prices sophisticated trucks

Marginal increase in interest rates unlikely to dampen growth rates

Although availability of financing remains one of the key factors influencing growth in the CV industry, given that over 90% of the vehicles are financed, ICRA believes that any marginal increase in interest rates (of say, 50-100 bps) on CV loans may not dampen growth as 20.0% Trend in Cost of CV financing demand is likely to be influenced 18.0% more by the underlying 16.0% economic growth. ICRAs channel 14.0% check suggests there has been a 12.0% marginal increase in CV financing rates over last six months, largely 10.0% because of the implementation 8.0% of base rate.
IRR for new CV financing

Chart 3: Trend in CV financing rates

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Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10

Average CV Financing Rates

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ICRA Rating Feature

Indian Commercial Vehicle Industry: An Update

According to our estimates, marginal increase in interest rates is unlikely to have a material impact on CV demand as 50-100 bps increase in IRRs translates into to a marginal increase (2%) in EMIs. While heightened risk aversion during the economic slowdown had forced some financiers, particularly private banks, to shy away from CV financing, now, with economic growth picking up and the operating environment improving for fleet operators, most private banks have re-entered the CV financing market. While competition among banks, non-banking finance companies (NBFCs), and the captive financing arms of the OEMs is on the rise, there has been no significant relaxation in lending norms (in terms of LTV, tenure, and customer filtration criteria) by financiers.
Table 3: Impact of Change in IRRs on EMIs Key Assumptions M&HCV Chassis Value (Rs. lakh) 13.0 Body Build-up Cost (Rs. lakh) 3.0 Total Truck Cost (Rs. lakh) 16.0 LTV on Chassis 95.0% LTV on Body 75.0% Loan Amount (Rs. lakh) 14.6 Tenure (months) 48 IRR 11.0% EMI (Rs.) 37,392 Change in EMI/50 bps change in IRR Change (%) Source: Discussions with industry, ICRAs estimates

11.5% 37,728 336 0.9%

12.0% 38,067 339 0.9%

12.5% 38,407 340 0.9%

13.0% 38,748 341 0.9%

Overall, the loan disbursal levels are currently growing at a steady pace in line with the underlying growth in the CV industry. The delinquency levels2, which had increased sharply during the downturn, have been declining post Q1, 2009-10, with fleet operators reporting favourable operating cash flows. In fact, for some financiers, the delinquency levels are almost back to the levels prevailing before the downturn witnessed in H2 FY2009. In terms of lending norms, the LTV ratios, particularly for large fleet operators with superior creditworthiness, remain high, averaging 90-95% (for M&HCVs, only chassis). In the case of LCVs, given the higher risk perception associated with borrowers belonging to this segment, the LTV ratios remain between 70%-80%. While the overall financing environment has improved, the risk associated with the first time users (FTUs) segment remains high, as reflected by a spread of almost 250350 bps between large fleet operators and FTUs.

Freight rates hold firm in some regions; impact of fuel prices is largely passed on barring some impact of demand-supply mismatch
After a period of tight liquidity during the downturn, the operating environment for fleet operators has been improving since Q4, FY2010 on account of several factors, including: (a) overall pick-up in freight demand; (b) increase in freight rates; (c) reduction in interest rates; and (d) some relaxation in lending norms by financiers. Although not substantially, but freight rates have moved up by an average of around 8-10% on certain routes during the last two to three quarters and continue to hold firm. Fuel prices are largely passed on by the truck operators barring some mismatch in demand-supply mismatch resulting in some time lag. At times, in a scenario of rising fuel prices and increasing ownership costs, small fleet operators tend to get hit as freight rates continue to be influenced by demand-supply mismatches

Share of total loan portfolio overdue for 90 days or higher, was estimated to have been ~6-7% for M&HCV loan portfolios and ~3-4% for LCV loan portfolios of the more established players. ICRA Rating Services Page 6

ICRA Rating Feature

Indian Commercial Vehicle Industry: An Update

Chart 4 & 5: Trend in Freight Rates on Return and Single routes

Freight Rates (in Rs.) - 9T Truck)

50,000

Trend in Freight Rates on major routes

70,000

45,000
40,000

65,000
60,000 55,000

35,000
30,000

25,000
Aug-08 Aug-09
Aug-10

50,000
Oct-08 Apr-08 Oct-09 Feb-10
Feb-09

Delhi-Mumbai-Delhi Mumbai-Chennai-Mumbai

Delhi-Kolkata-Delhi Delhi-Chennai-Delhi (RHS)

Freight Rates (in Rs.) - 9T Truck)

40,000
35,000 30,000

Trend in Freight Rates on major routes - one way

25,000
20,000

While freight rates are largely a function of overall economic activity, demand-supply mismatches in a particular region can and do impact local freight rates significantly. For instance, a pick-up in industrial activity in the western and southern parts of the country tends to influence freight rates on these routes, while in the northern parts freight rates tend to get influenced by trend in agricultural output.
Source: Industry Analysis Service (IAS), ICRAs estimates

Apr-10

Apr-09

Jun-08

Jun-09

15,000
10,000
Aug-08 Aug-09
Aug-10

Oct-08

Apr-08

Oct-09

Dec-09

Dec-08

Jun-10

Dec-09

Feb-10

Feb-09

Apr-10

Apr-09

Jun-08

Jun-09

Chennai-Delhi
Delhi-Kolkata

Chennai-Mumbai
Mumbai-Chennai

Dec-08

Delhi-Chennai
Mumbai-Delhi

Delhi-Mumbai
Kolkata-Delhi

Large fleet operators providing dedicated logistics solution to organised-sector clients tend to insulate themselves from fluctuation in fuel prices through periodic fuel price adjustments. While in recent months, the operating cost structures of fleet operators have turned somewhat weaker because of the increase in vehicle prices and the marginal rise in interest rates, freight availability has kept the load factor at optimum levels. The capacity addition made by some large fleet operators also shows that demand from the industrial segment remains fairly strong.

Road freight evolving into higher value add, to aid in cushioning cyclical downturns and competition from alternate modes of transport
The road freight segment in India is gradually evolving from being a pure transportation business to a complete, service-based, end-to-end logistics solutions industry, which is a positive for the players in the organised road transportation sector. With competition from the unorganised sector getting keener, players in the organised segment have either diversified into higher-margin services such as transportation of sundry goods, over dimensional cargo or tied up with large clients, particularly in the automotive, pharmaceutical, and retail sector to provide complete supply chain solutions. Most of the organised-sector players in the road freight transportation business operate on an asset light model, wherein a large part of their fleet is either attached fleet or sourced from local truck markets. Part of the fleet is owned by the fleet operators only to gain long-term business contracts from large clients and ensure reliability in service. Large fleet operators have been looking at providing multi-model logistics solutions via a combination of rail and road network and exploring opportunities in this area through: (a) JVs with container cargo movers; or (b) long-term rake hire contracts with the railways.

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Jun-10

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ICRA Rating Feature

Indian Commercial Vehicle Industry: An Update

Profitability indicators of CV manufacturers likely to remain stable

After deteriorating sharply during the downturn, the profitability indicators and credit profiles of all the OEMs in the domestic CV industry have been on an improving trend, being driven by strong growth in volumes and the benefits accruing from the cost-management measures initiated during H2 FY2009. Over the last few quarters, increases in the prices of commodities, particularly rubber, have impacted the margins of some players to an extent, even as the strong underlying demand has allowed the OEMs to regularly pass on the increases in raw material prices to an extent.
Chart 6: Trend in profitability indicators of CV OEMs
Trend in Tata Motor's Financial Performance
Amount (in Rs. Crore)
14,000 12,000 10,000 8,000 6,000 4,000 2,000 15.0%

Trend in Ashok Leyland's Financial Performance

Amount (in Rs. Crore)
10.0% 5.0% 0.0% -5.0%
-10.0%

3,500 3,000 2,500 2,000 1,500 1,000 500 -

14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 FY09 FY09 FY10 FY10 FY10 FY10 FY11 FY11

Operating Income OPBDIT OPBDIT/OI (%) PAT/OI (%)

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 FY09 FY09 FY10 FY10 FY10 FY10 FY11 FY11

Operating Income OPBDIT OPBDIT/OI (%) PAT/OI (%)

Trend in Eicher Motor's Financial Performance

1,200 1,000 800 600 400 200 (200) 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0%

Trend in Swaraj Mazda's Financial Performance

Amount (in Rs. Crore)
250 200 150 100 50 (50)

Amount (in Rs. Crore)

20.0%
10.0%

0.0% -10.0%
-20.0%

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 FY09 FY09 FY10 FY10 FY10 FY10 FY11 FY11 OPBDIT OPBDIT/OI (%)

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 FY09 FY09 FY10 FY10 FY10 FY10 FY11 FY11

OPBDIT OPBDIT/OI (%)

-30.0%

Operating Income

PAT/OI (%)

Operating Income

PAT/OI (%)

Source: Company Releases; ICRAs estimates

Outlook
The medium to long term outlook for the domestic CV industry remains robust, given the expectations of strong economic activity and infrastructure development, besides the inter-segmental shift. However, the sharp growth in volumes that was witnessed during the last 6-7 quarters may moderate to an extent in the short term. The contributing factors include, among others, partial withdrawal of the stimulus package; expected increase in interest rates; increase in vehicle prices following the successive price revisions (upward) made by the OEMs following the rise in input material costs; and the absence of the pre-buying that happened ahead of implementation of BS III norms. While the long-term growth prospects for the domestic CV industry remain favourable, pricing flexibility for the OEMs is likely to remain constrained mainly because of the entry of new players in the industry and the capacity additions taking place. Besides, the CV industry would also have to cope with the cost pressures arising from the tightening of regulatory norms on safety and emission. Over the medium term, the growth is likely to be higher in the upper end of the M&HCV segment (that is 16T and above) and in the lower band of the LCV segment (that is less than 3.5T segment). We expect the domestic M&HCV segment to grow in the range of 9.5%-11.5% over the next five years and the LCV segment to grow in the range of 10-13% with growth in the (less than 3.5T) estimated to be higher at 1315% during the same period.

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Indian Commercial Vehicle Industry: An Update

Annexure: Structure of the Indian CV Industry

The CV industry in India is split between the LCV and M&HCV segments, with the classification being based on gross vehicle weight (GVW). According to industry norms, vehicles with GVW less than 7.5 tonnes are classified as LCVs while the ones heavier than these are termed MCVs/HCVs. In terms of usage, CVs may be categorised as goods carriers and passenger carriers. Among passenger carriers in the less than 7.5 tonne GVW segment, those with sitting capacity up to 13 are categorised as utility vehicles (or UVs, and not part of LCVs) while those with capacity over 13 passengers are grouped as LCVs. At present, the overall CV industry is split between the LCV and M&HCV segments roughly in the ratio of 45:55. Around 13% of the vehicles sold in the LCV as well as the M&HCV segments are passenger carriers. Besides LCVs and M&HCVs, three-wheelers that can carry load up to 1.5 tonnes are also an important mode of goods transport. These vehicles, with better manoeuvrability through traffic, are preferred for last-mile distribution. However, the sub 1T LCV segment has given stiff competition to the three-wheeler segment owing to their inherent advantages. Ownership of trucks in India remains highly fragmented, with most of the larger transport companies hiring trucks from small truck owners. Currently, the larger fleet operators are increasing their share of the corporate/wholesale business, while the smaller ones are providing the incremental capacity on hire to the larger operators. The smaller fleet operators are also able to better manage issues like overloading and unofficial payments at check posts, which have become an integral part of the road transportation business in India. However, with the logistics industry getting organised on the prompt of higher outsourcing of logistics by manufacturing industries and the tighter implementation of overloading restrictions, a trend of consolidation appears to be emerging in the organised segment of the road transport industry. Nevertheless, the industry is expected to remain largely unorganised in the medium term. Over the last two decades, both the LCV and the M&HCV segments have grown at similar rates, although volume growth in the M&HCV segment has been more volatile. Growth in both the LCV and M&HCV segments is linked to economic activity and the level of infrastructure development, and exhibits cyclicality. The truck segment of the business (M&HCV goods carriers) is however prone to lumpy capacity addition at the fleet operator level and hence experiences more severe demand shocks. The LCV segment, though cyclical, usually exhibits steadier demand patterns on account of the relatively wider usage range. Most market segments of the Indian CV industry currently operate as duopolies, with the top two players together accounting for a market share of over 85%. The segment-wise market shares of the leading players are presented in the following table:
Table 4: Trend in market share in the LCV segments FY06 FY07 Domestic Domestic LCV - Passenger Segment Tata Motors 49.1% 50.1% M&M* 12.1% 14.9% Force 19.3% 15.6% Others 19.5% 19.4%

FY08 Domestic 47.8% 19.7% 15.6% 16.9%

FY09 Domestic 51.7% 19.0% 14.9% 14.3%

FY10 Domestic 55.7% 14.6% 16.8% 12.9%

YTD FY10 Domestic 55.6% 16.8% 15.1% 12.45

YTD FY11 Domestic 48.0% 14.5% 21.2% 16.3%

LCV - Goods Segment Tata Motors 62.1% 67.6% 64.3% M&M* 28.7% 25.6% 26.5% Swaraj Mazda 2.5% 1.2% 1.4% Others 6.7% 5.5% 7.9% Source: SIAM data; * includes volumes for Mahindra Navistar

61.1% 29.2% 0.9% 8.8%

58.9% 32.1% 0.7% 8.3%

61.2% 29.8% 0.7% 8.3%

57.1% 35.1% 0.4% 7.5%

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ICRA Rating Feature Table 5: Trend in market share in the M&CV segments FY06 FY07 Domestic Domestic M&HCVs - Passenger Segment Tata Motors 43.9% 47.9% Ashok Leyland 47.7% 40.7% Swaraj Mazda 4.1% 5.0% Eicher Motors 3.1% 5.6% Others 1.1% 0.8% M&HCV - Goods Segment Tata Motors Ashok Leyland Eicher Motors Others Source: SIAM data

Indian Commercial Vehicle Industry: An Update

FY08 Domestic 43.8% 45.5% 5.4% 4.7% 0.6%

FY09 Domestic 44.3% 45.9% 4.6% 3.8% 1.4%

FY10 Domestic 51.3% 38.1% 4.3% 4.5% 1.8%

YTD FY10 Domestic 50.0% 37.1% 5.0% 5.8% 2.0%

YTD FY11 Domestic 45.8% 40.7% 6.5% 5.8% 1.1%

64.9% 23.8% 8.1% 3.2%

64.7% 26.4% 6.9% 2.0%

63.2% 24.5% 8.8% 3.5%

66.1% 20.9% 8.2% 4.8%

65.9% 20.2% 9.5% 4.5%

68.1% 17.8% 9.6% 4.5%

62.9% 22.6% 10.0% 4.6%

In the LCV segment, Tata Motors and M&M enjoy a dominant market share. Force has a strong presence in the passenger LCV segment. Piaggio is a relatively new entrant in the goods LCV segment. The M&HCV segment is dominated by Tata Motors and Ashok Leyland, followed by Eicher Motors. Ashok Leyland is particularly strong in the passenger M&HCV segment and has traditionally enjoyed a slightly higher market share over Tata Motors.

Analyst Contacts
Chennai Pavethra Ponniah (pavethrap@icraindia.com, 91 44 45964314) Delhi Anupama Arora (anupama@icraindia.com, 91 124 4545303) Jitin Makkar (jitinm@icraindia.com, 91 124 4545368) Shamsher Dewan (shamsherd@icraindia.com, 91 124 4545328) Mumbai Kinjal Shah (kinjal.shah@icraindia.com, 91 22 30470054) Subrata Ray (subrata@icraindia.com, 91 22 30470027)

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ICRA Rating Feature

Indian Commercial Vehicle Industry: An Update

ICRA Limited
An Associate of Moody's Investors Service
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