According to ratings agency ICRA, demonetisation will impact CV sales in the near-term as fleet operators are likely to put new vehicle purchases on hold.
23 Nov 2016 | 10829 Views | By Autocar Pro News Desk
The Indian government’s two-week-old demonetisation move and the resultant cash crunch is gradually having its impact on the automobile industry across the passenger vehicle, two-wheeler and the commercial vehicle sectors.
The commercial vehicle industry, which has seen inclement fortunes in recent times, is the latest to feel the pressure. ...
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The Indian government’s two-week-old demonetisation move and the resultant cash crunch is gradually having its impact on the automobile industry across the passenger vehicle, two-wheeler and the commercial vehicle sectors.
The commercial vehicle industry, which has seen inclement fortunes in recent times, is the latest to feel the pressure. It is understood that a good number of M&HCVs have stopped plying across the country. According to ratings agency ICRA, demonetisation will impact CV sales in the near-term as fleet operators are likely to put new vehicle purchases on hold.
In a note released today, ICRA says: “Despite high financing penetration in the CV space, the impact of tight liquidity is likely to cripple the road logistics sector in the near-term and would prompt the transport community to put their vehicle replacement or addition plans on the back burner.”
Over the past 3-4 months, CV sales, especially M&HCVs (trucks) have been on a declining trend on account of waning replacement demand, weak industrial activity and uncertainty related to the impact of Goods & Services Tax (GST) regime on vehicle prices. Sales of M&HCVs in July, August and September 2016 declined sharply after consistent growth. Now, with the demonetisation move, the demand for CVs is expected to come under further pressure, which was otherwise expected to get a boost by the end of the fiscal from pre-buying following the implementation of BS-IV emission norms from April 2017 onwards.
Drop in demand for trucks
ICRA’s channel check with various stakeholders in the logistics sector including road transporters, CV dealers and Non-Banking Finance Companies (NBFCs) suggests that although it is too early to assess the full downside, the impact of the liquidity crunch has already resulted in a near-term drop in demand for trucks. Availability of trucks, especially from market-load operators, has also reduced significantly due to limited availability of cash to meet trip expenses. CV financiers also reveals that proportion of cash collections have also dwindled over the last 10 days.
According to some of the leading NBCFs, cash collections account for almost 30-60% of transporters overall collections depending on their customer (i.e. high share of Small Fleet Operators (SFOs) or First Time Users (FTUs)) or portfolio-mix (i.e. SCVs and tractors have higher share of cash collections). Segments such as Small Fleet Operators (with fleet size of 3-5 trucks) and LCV owners are the ones that generally pay their EMIs in cash by visiting the branches or collection centers, while most large fleet operators use the banking system. According to the financiers, the impact of liquidity crunch will be more in Tier II/III cities and rural India then so much in Metros or Tier I towns.
While most financiers believe that the cash crunch would ease in the next couple of weeks, the bigger worry is that this may be followed by a period of slowdown, which would impact viability of fleet operators and their ability to service loans in a timely manner. ICRA believes that delinquency levels may inch upwards in the near-term. To offset the impact of demontisation, companies have been suggesting their customers to service EMIs either through cheques or bank transfers. In addition, they are also considering installing Point of Sale (POS) machines in their branches to overcome the challenge.
ICRA says, demand for trucks has fallen by 15-30% and market load operators have been hit the most due to high reliance on cash-based transactions to meet trip expenses. Its talks with some of the organised fleet operators suggest that their own-fleet operations have not been hit as severely as the market load operators as they have moved to large part of their operations to cash-less transactions. However, certain expenses which can't be met through online payments are adding to the problems.
New vehicle enquiries dry up
According to CV dealers, new vehicle enquiries have dried up and customers have also put existing orders on hold. Based on inputs from dealers, ICRA says even ongoing transactions have been put on hold by fleet operators after the demonetisation move. Although ~90% of CV sales in India rely on external financing, but market sentiment has turned subdued and fleet operators are likely to put their fleet expansion or renewal plans on hold till the situation settles down.
The inventory levels in the system currently stands at around 4-6 weeks and are likely to go up in the near-term as OEMs would continue to dispatch vehicles already produced. However, to realign inventory levels with demand, OEMs are likely to take production cuts in the near-term till liquidity in the system improves.
The Federation of Automobile Dealers Associations (FADA), the apex body of authorised automobile dealers in India, has also seen an immediate and adverse impact on the market due to a cash crunch and the resultant slowdown. It has also urged automakers to reduce inventory levels at their dealerships.
Related:
- Demonetisation leads to dip in car bookings across India
- FADA says demonetisation has put auto retail trade ‘under severe stress’