CHANGING TRENDS IN INDIAN

COMMERCIAL VEHICLE INDUSTRY

CONTENTS:
COMMERCIAL VEHICLE
INDUSTRY
o Introduction
o Assets
o Operators
o Manufacturers
FACTORS AFFECTING CV
INDUSTRY
o Economy Health
o Government Policies
o Diesel
o Tyre Industry
o Insurance Cost
o Financial Services
o Railways
TRENDS IN CV
o Freight Rates
o Funding Trends
o Total Sales Volume
o Segment Wise Sales
PLIGHT OF TRANSPORTERS
(LIVE MARKET SITUATION)
FUTURE OUTLOOK








COMMERCIAL VEHICLE INDUSTRY












INTRODUCTION

Commercial Vehicles are an important source of transportation for both goods and passengers.
According to NHAI estimates, 70% of freight traffic in India is carried by the roads with the
balance being carried by the railways.
Lack of adequate infrastructure/highways and complex taxation and regulations structure are
major obstacles for logistics players in India.
Despite the limitations, one can visualize a strong potential in this sector, Government has
undertaken several projects to expand the road network nationwide for providing connectivity
and mobility in both the rural and urban areas, the emergence of India as a manufacturing hub,
growth of the organized retail industry, increased domestic consumption, and the global best
practices of multinationals are all expected to boost the transport and logistics industry.
Tax structure also has been made less complex to an extent by introduction of uniform national
permit tax & with GST to come scenario will further improve.
In recent years, as the country emerged as one of the fastest growing economy in the world,
India has seen a substantial increase in demand for trucks, buses, and other commercial
vehicles.





ASSETS

Indian commercial vehicle industry can be broadly divided on basis of usage into two
segments: Goods vehicle (trucks) and Passenger vehicles (buses).


These are classified according to seating capacity as given below:-

SEGMENTS SEATIING
CAPACITY
POPULAR MODELS APPLICATIONS
Light
Commercial
Vehicles
Seating
capacity<=32
Eicher10.50&10.75, Tata LP 410,
LP 709, LP 1109, M&M Mini
bus, Swaraj Mazda Super, M&M
Tourister, Tempo Traveller
As tourist bus, ambulance,
School Bus, RTVs town
busses
Medium &
Heavy
Commercial
Vehicles
Seating
capacity<=52
AL Viking, Tata 1510 & 1512,
Eicher School Bus, Tata Globus,
Volvo B7R, Eicher 2015, SML
Isuzu LT 134
School Bus, blue line, Inter
city, Inter state bus tourist
bus, DTC low floor busses

Passenger Vehicles


Goods Vehicles

On basis of payload these can be divided into:
Light commercial vehicles (LCV) with payload of less than 8 Tonnes
Medium and Heavy commercial vehicles (MHCV) with payload of greater than 8 Tonnes
These are further classified according to gross vehicle weight as given below:-

SEGMENTS GVW/
PAYLOAD
POPULAR MODELS APPLICATIONS
Small
Commercial
Vehicle(SCV)
3 wheeler


Mini
Trucks/Pick-ups



<2 T / <0.8 T


2-3.5 T / 0.8-2 T




Bajaj RE 600, Bajaj GC
Max / CNG, M&M Alpha
Load/ CNG, Piaggio Ape
Xtra, M&M Champion.
Tata Ace/CNG, Mahindra
Pickup, Tata 407 Pickup,
Tata Super Ace



Short distances, Intra-city transport,
narrow village roads


Short distances, Intra-city transport,
narrow village roads
Light
Commercial
Vehicle(LCV)
3.5-7.5 T / 2-4 T Tata 407 & 709,
Mahindra 3200
Inter-city & Inter-town transport of high
volumes of light weight goods such as
soaps, metal scraps, furniture and
consumer durables.
Intermediate
Commercial
Vehicle(ICV)
7.5-12 T / 5-8 T Tata LPT 1109, Eicher
10.9 & 11.1
Intra-state and nearby state transport of
consumer products and bulky goods such
as cement, bricks, fisheries, refrigerated
containers
Medium
Commercial
Vehicle(MCV)
Single Axle




Tipper



12-16.2 T / 9-13
T




<=16.2 T / 11-12
T



ALL Comet, Tata LPT





ALL 1616XP, Tata LPK
1615, Eicher Terra 16
HDR



All terrain (hilly/highway/metallic/kuccha
roads) transport of medium to heavy
goods such as cement, coal and
construction materials, agriculture
products, auto components, refrigerated
containers, water tankers and white goods
All terrain (hilly/highway/metallic/kuccha
roads) and used for mining and
construction
Heavy
Commercial
Vehicle(HCV)
Multi Axle
Vehicle





Tractor &
Trailer




Tipper





16.2-35.2T/11-
20T


>25 T / 20-30 T


26.2-35.2 T/ 20-
28 T

>35.2 T / 28-40 T


16.2-25 T / 18 T


25-35.2 T / 21 T



ALL 2516, Tata LPT
2515


Eicher 35.31, ALL 3116
XL

ALL 3518, Tata LPS
3516

Tata LPS 4018, Tata LPS
4923, Eicher 40.40, ALL
4023 XP
ALL 2518 XP, Tata LPK
2516

Volvo FM400, ALL U-
3123 T



All terrain, long distances transport of
heavy density loads such as construction
materials , petroleum products, cement
mixers, containers and tankers
All terrain, long distances transport of
ODC, heavy machinery, LPG, containers,
petrochemicals
Long distances highway transport of port
cargo, automobiles, steel products and
machineries
Long distances highway transport of port
cargo, automobiles, steel products and
machineries
All terrain (hilly/highway/metallic/kuccha
roads) and used for mining and
construction
All terrain (hilly/highway/metallic/kuccha
roads) & used for mining and construction


OPERATORS

Goods Transport operators: Road freight transportation is highly fragmented consisting of
players who provide the transportation services, intermediaries (transport contractors / booking
agents),brokers supplying equipment, drivers for commission and the consignors constituting
the ultimate demand for the services. Transport operators are classified into:
Small fleet operators (SFOs) having 1-5 trucks,
Medium fleet operators (MFOs)having 5-16 trucks and
Large fleet operators (LFOs) having 16-20 trucks.
Significant part of business is outsourced to SFOs, who operate on hire charges and depend on
brokers and other fleet operators who in turn depend on the booking agents for obtaining
business as these operators do not have the geographical reach and necessary infrastructure to
tap business on a continuous basis. But these 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.
The LFOs, organized-sector players are small in number, and generally operate throughout the
country. These transport companies generally have formal contracts with the users. Some have
ventured into offering value-added services such as courier and express cargo business and
providing third party logistic services, warehousing, supply chain solutions, cold chains etc.



These operators are further classified according to nature of working in the market:
1. Market Load/open barrier operators: They attach their vehicles informally in the market
and carry goods on freight rate decided at the point.
2. Contractual operators: They make a formal contract. Contract can be written (has clauses
and pre decided rate) or verbal (based on mutual understanding).
3. Captive operators: This segment accounts for a small proportion of CV sales. Some
companies/industries use these vehicles primarily for their own employee and material
transportation.
4. Parcel load operators: These collect small goods from different locations and assemble at a
hub, then transport to different locations with fully loaded truck.

Bus operators: These are classified according to permits:
1. Contract carriage operators- They operate mainly for schools and companies to carry
children/staff
2. Route permit operators- These operate inter cities like Delhi-Jaipur, Delhi-Lucknow etc.
3. Stage carrier operators- These operate in city and nearby regions like Delhi-Noida, Delhi-
Palwal
4. City permit operators- These operate intra-city like blue line busses
5. Tourist permit operators- They carry tourist passengers to tourist destinations maybe from
one city to another.



MANUFACTURERS



The Indian market is already largely consolidated, with a 90 percent market share split between
only a few local manufacturers. This increases the entry barriers to this industry making it an
oligopolistic. But very gradually scenario is changing.
With environmental norms becoming stricter and consumers demanding better technology
vehicles, it has become imperative for the manufacturers to either have technology partners or
a strong in-house R&D.
In order to overcome the variability in demand, players in this industry have a wide array of
products. A wide-spread distribution network is now provided by the manufacturers with a
large and geographically diverse presence. Availability of spare parts and service centers is
becoming crucial for servicing the customer and developing brand loyalty.
In addition, presence in passenger carrier segments can act as a cushion during times of
economic downturn, as this segment is not highly correlated to economic growth and hence
experiences lesser volatility in demand.

Tata Motors Ltd.: The company is the largest commercial vehicle manufacturer in the
country. Rapidly expanding globally with a series of acquisitions such as Daewoo
Commercial Vehicle Co. Ltd. (2004) and Hispano Carrocera S. A., Spain, (2009) and joint
ventures with Thonburi Automotive Assembly Plant Co., Thailand, (2006) apart from
several other strategic alliances in the commercial vehicles space.
Mahindra & Mahindra Ltd.: A relatively new player in the segment, the company formed a
joint venture with International Trucks in November 2005 to manufacture M&HCV trucks
in India.
Ashok Leyland Ltd.: The company is the second-largest player in the commercial vehicles
segment in India.
Eicher Motors Ltd.: A leading player in the LCV trucks segment, Eicher entered the
M&HCV trucks segment recently; it has also entered into a joint venture with Volvo for
the manufacture of commercial vehicles.
Volvo India: The company is one of the leading players in luxury passenger buses and
heavy duty tippers.

Tata Motors is the market leader in both the goods and passenger vehicle segments.
Tata Motors followed by Ashok Leyland are dominant players in MHCV.
The LCV market is dominated by Tata Motors, followed by Eicher.




High volume in the Indian CV market has been successful in gaining the attention of global CV
majors
The JV between Ashok Leyland and Nissan to manufacture LCVs and MCVs in India (this
JV has already launched a sub-2 ton CV 'Dost' in March 2011 in India) &
JV between Mahindra and Navistar to manufacture M&HCVs in India which has received
a good response from market.






















FACTORS AFFECTING CV INDUSTRY












1. ECONOMY HEALTH

Demand for commercial vehicles is driven by countrys overall economic growth as
transportation is associated with all sectors of economy. Industrial& agricultural growth
directly affects CV industry. This cyclical nature in transport industry is caused by a
dependency on overall economic development. Industrial Production in India increased 0.1
percent in April of 2012. Historically, from 1994 until 2012, India Industrial Production
averaged 7.4 Percent reaching an all time high of 20.0 Percent in November of 2006 and a
record low of -7.2 Percent in February of 2009. Industrial growth entered the negative
zone in Mar/12 with -3.5%. None of the broad sectors are performing well at present.



After two consecutive years of good monsoon, the law of averages says 2012 could be a
year of uneven rains therefore will affect agricultural output and demand of trucks too.

Depreciating rupee (in recent past) makes imports costlier and manufacturers pass these
costs to operators affecting their viability.

Declines in gross domestic product (GDP) leads to a fall in the transportation of goods,
and surplus trucks are temporarily decommissioned. When demand rises again, companies
put these trucks before buying new ones, leading to a time-lag between the rise in GDP
and the demand for new trucks.













2. GOVERNMENT ROLE

Excise duty hike: The FM in budget 2012-13 proposed to charge excise duty at an ad
valorem rate on CV chassis, instead of a mixed rate of 10 per cent plus Rs 10,000 and 22 per
cent plus Rs 10,000. The duty now stands at 15 per cent and 25 per cent. Buses and trucks
fall under the 10 per cent-plus category and dumpers under the 22 per cent-plus category.
Later it was announced a small cut in the excise duty on chassis for commercial vehicles by
a percentage point. Manufacturers will pass on the increased cost to customers affecting
demand of CV. Tata Motors has hiked the prices of its entire range of commercial vehicles
by up to Rs 60,000 and so have other manufacturers following this news.

Interest rates: RBI governs the interest rates offered by NBFCs and banks which in turn
affect purchasing of CVs on credit.

Emission norms: With the introduction of Euro IV equivalent measures in the National
Capital Region of Delhi and other 11 metropolitan areas, and Bharat Stage III (Euro III) in
other parts of country, the manufacturers passed the increased manufacturing costs to
customers




Mining ban: The recent mining ban in Karnataka and the political uncertainty in Andhra
Pradesh due to the Telangana issue affected sales of commercial vehicles in Ashok
Leyland's bastion in southern region.

Permit Tax: The Centre increased the national permit fee for trucks and goods vehicles by
10 per cent to Rs. 16,500 in last fiscal. Most States had demanded a hike of about 15 to 20
per cent on the current fee rate of Rs. 15,000 but the hike of 10 per cent would be reviewed
after two years.

Infrastructure Improvement: Roads occupy a crucial position in the growth and
development of the transportation industry. Poor road quality affects capacity of transport
operators (because of congestion and additional travel time), wear and tear on vehicles,
safety, and pollution.
However, increased Government focus on roads and highway development (such as Golden
Quadrilateral or GQ and North-South-East-West or NSEW Corridor) with significant
investments already made are positives for the transportation industry. Such a network may
enable further market share gains for road transport over railways, allow for plying of more
powerful multi-axle trucks (that are more economical) and lead to shorter turnaround time.
As the smaller towns and villages get connected to the highway system and more migrants
move out of the villages, demand for commercial transport services will only increase in the
future.



To ease traffic congestion in cities, the bus transit systems have been introduced and
upgraded across the country. The federal government continues to finance the introduction
of modern buses, comfortable enough to encourage commuters to switch from personal
vehicles in cities.

Other Policies: The decision to increase FDI in single-brand retail was taken along with
opening the gates for overseas investment in multi-brand retail (though put on hold), this
increased the demand of transport vehicles. FDI in automobile has led to intense
competition making more technologically advanced vehicles at lower prices.


3. DIESEL PRICE

Even though government has postponed deregulation of diesel price and hiked the duties on
diesel cars but a phased deregulation of diesel prices will be done in order to rein in runaway
fiscal deficit as indicated in budget 2012-13 and reduce growing under-recoveries of oil
marketing companies. There will not be immediate full phased deregulation as it will cause
cascading effect on overall prices of commodities since diesel is the basic transport fuel.



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Barrel Price in $

Previous left graph shows continuous increase in diesel prices, estimated increase in 2012-13 is
5-6 %.
Increase in diesel price immediately effect open market load operators, contractual segment is
not affected much since their revenue is increased as per the clauses in contracts.
Our majority of crude requirements are imported. Above right graph shows crude price over
the years. Presently crude price is falling but depreciated rupee (status improving but slowly)
still impacts crude buy in India.













3. TYRE INDUSTRY




Price of natural rubber affects price of tyres significantly as natural rubber is required in
majority. All other raw materials are derived from crude therefore, crude price also affects tyre
industry. Increased tyre cost affects viability of transporters.
We import a large amount of rubber, about 18% of natural rubber consumption is met through
imports, and the weakening of rupee against dollar will increase the tyre cost.

0
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150
200
250
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Avg. Natural Rubber price(Rs. per Kg)
Natural
rubber
44%
Synthetic
rubber
14%
Nylon tyre
cord fabric
19%
Carbon black
12%
Rubber
chemicals
5%
Others
6%
Raw materials

As companies across tyre industry have raised prices owing to higher input costs, there could
be increase in demand for retreading by customers which could affect demand in replacement
market going forward.
Trucks are still run on cross ply tyres rather than radial tyres, but slowly industry is moving
towards radialization as transporters have realized it increases efficiency. Poor road conditions,
overloading of trucks, higher cost of radial tyres and poor awareness of tyre users are main
reasons for non transition to radial tyres.


Domestic players are expected to face additional pressure with the lifting of anti dumping duty
(ADD) (with effect from August 2011) on Truck and Bus radials (TBRs) imported from China
and Thailand. The lifting of ADD has made the importing TBRs cheaper by ~15-20%, limited
domestic demand and pricing power due to increased competition.
0
20
40
60
80
100
120
Passenger cars Trucks & Busses
Radialization %

4. INSURANCE COST

Motor insurance consists of two parts -- own damage liability and third party liability. OD is
not regulated, unlike third party rates, and insurers are free to price risks. Third party
constitutes 35 per cent of motor policy premiums, and the rest is OD.
Commercial vehicles are categorized as bad risks in the general insurance industry because of a
higher number of accidents and resultant claims arising out of them. Insurance companies
raised premium on commercial vehicles own-damage insurance cover as they hope to sell
enough comprehensive (own-damage and third-party) insurance policies to compensate the
additional risks they take on standalone third-party policies due to the abolishment of third
party motor insurance pool by the Insurance Regulatory Development Authority (IRDA),
announced last December, that was effective from April 1 2012. About 50-60 per cent
premium hike has been seen in commercial vehicle comprehensive insurance policy compared
with what was being charged last fiscal. The premium under third party component of
comprehensive and third party policy went up by up to 20 per cent from April 1 2012.






5. FINANCIAL SERVICES

Most CVs (over 90%) are bought on credit, and hence any change in interest rates, LTV and
tenure has an immediate impact on CV sales. Availability of financing remains one of the key
factors influencing growth in the CV industry. Credit to transport operators is typically at
higher interest rates, because of the increased risk profile. Further, a significant proportion of
trucks are purchased by small truck operators in the unorganized sector, who may have to pay a
relatively higher rate of interest as compared with large-fleet operators, and are more
vulnerable to interest rate fluctuations.
Traditionally, financing was left to the institutions for whom the business was their core
competency. However, in order to provide complete buying assistance to the purchasers at the
point of purchase, many of the CV manufacturers set up their own financing companies or have
tied up with banks & NBFCs.








6. RAILWAYS

Over the years, road transport has started playing an increasing role in transportation, as the
share of the railways, in terms of percentage of goods moved, has declined. The share of road
freight traffic has increased from around 10-11 % in the 1950s to around 60% in 1995, and
70% at present.
Faced with capacity constraints, the railways have chosen to concentrate on the movement of
bulk materials like coal, iron ore, and fertilizers for the core sector (power, steel, cement, etc.),
thus losing its clientele in the high-value non-bulk sectors like cement, finished steel, and food
grains which has reported higher growth rates. Even if the railways were to desire an increase
in the share of this traffic, it would still have to depend on road transport to ensure door-to-door
delivery
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. 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 country's improving highway network.
But still the competition posed by the Railways to long-haul HCVs cannot be neglected
completely. CONCOR started covering market share of freight away from CVs in 2010,
therefore demand for CVs diversified. CONCOR due its wagon carrying capacity of 50-60


tonnes could offer huge discounts especially for coal sector. But due to recent damage issues of
goods along with its mismanaged responsibility structure, they started losing their share.























TRENDS IN CV








1. FREIGHT RATE

Freight rates are determined by following factors: the quantity of goods to be moved and the
number of trucks around to move the goods ie. demand-supply scenario prevalent at any time
in the country. This in turn is driven by economic activity and cost factors discussed before.

Freight rate is usually not increased immediately, it takes time to increase the freight rate for
market load operators because of unorganized nature of this industry, and these operators
(market load) are forced to absorb this price hike, which has adverse effect on their margins.
However, these operators are only able to pass on the increase in cost in the form of higher
freight rates only in a scenario of good freight availability.

Most of the LFOs in the industry have contractual agreements having an escalation clause,
clearly stating that for any increase in fuel price, the freight rate shall automatically increase.












During 2004 to 2007, there has been an increase in freight rates driven by higher growth in
industrial production.
Freight rate increased substantially in 2006-07 due increase in fuel prices in 2006 and
order of Supreme Court to quash the issuance of gold card/ tokens, which permitted
overloading of trucks in excess of the prescribed weight limit, by state governments. The
trucks found on roads carrying illegal excess load were offloaded till the legal limit.

111
122.93
127.1
140.24
165
167
172
171
174.3 174.5
0
20
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80
100
120
140
160
180
200
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Freight Index

During depression in 2008-09 last quarter and starting quarters of 2009-10, demand for
trucks was very low, but in 2010-11, demand for trucks rose due to increase in IIP and
truck manufacturers were not able to meet this demand, a gap was created with huge
demand for trucks therefore freight rate increased then.

But a lot of trucks were produced and put into market in late 2010-11 and 2011-12. The
gap created was now filled and freight didnt increase substantially since then. The fiscal
2011-12 marginal 10.6-18.3 per cent increase in rentals on trunk routes due to double-digit
increase in cargoes such as food grains, cereals, fresh fruits and vegetables while small and
medium enterprises sustained descent flow of dispatches from the manufacturing sector

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.

Freight rate variation within year follows a trend. In march freight rates highest because it
is closing of financial year and every industry trying to achieve targets, then in April, May
rates remain stagnant or fall slightly as it is more of planning phase for next year and rates
continue the same trend till August and September due to rainy season. Then freight rates
start picking up because of Diwali and continue same trend till end of financial year.




2. FUNDING IN CV



In 90s funding was tough (collateral based), with unorganized financers in market which
charged very high interest rates and banks had lot of formalities.
In early 2000s RBI gave banking license to ICICI, HDFC and few other companies.
Government banks then did not provide easy services to retail customers, the newly
formed

banks took this as advantage and started expanding aggressively by increasing their
coverage area and providing higher LTV to reputed operators and high end customers but,
IRR was kept high to mitigate risks. By focusing on retail sector, and providing services
best in those times they created a benchmark.
More and more transport operators became aware of standardized services being provided
by these banks. Due to increased demand for financing, competition became fierce and
LTV increased, interest rates fell and financing became easier. LTV even reached 100%
for the customers who had excellent track records.
This was the time when body funding started. Body funding declined a bit in 2004-05 but
it again gained momentum and peaked in 2005-06. The dependency of operators on
financers started to increase, used vehicle finance, refinance, tyre finance and insurance
finance services also grew. The funding became so easy that number of small operators
increased, ones who didnt have prior experience also jumped into the industry.
Around 2007 starting, due to increase in rates by RBI, IRR also shooted up.
During 2008-09, when economy of India hit its bottom, then these inexperienced and small
fleet operators who didnt have the hold in market were the first ones to suffer and started
defaulting. Number of defaults was maximum in late 2008-09 and early 2009-10.
Financers became very cautious funding norms became very tight, body funding slowed
down, interest rates soared, free finance ratio was checked rigorously, because at that
period operators with majority of free vehicles were able to withstand. Almost all
financiers tightened their credit terms significantly, lowering the LTV ratio, insisting on


more detailed documentation, and in general conducting a close greater scrutiny of loan
applicants
With economy reviving in early 2010 and government relaxing the interest rates, the
funding again started supporting the operators as they were able to maintain their viability.
With private sector banks increasing their presence in CV financing, competition was
likely to keep a check on rate increases to an extent. Approach towards lending norms (i.e.
LTVs, tenure, customer filtration) however, remained rational. Disbursal levels were
increasing steadily in tune with the underlying growth; delinquency levels have declined
sharply. LTV ratios remained (in favour of customers) above 95%+ for large fleet
operators with a credible track record.
In late 2010, Interest rates for CV financing marginally increased in the recent period on
account of implementation of base rates and overall increase in interest rates. Marginal
increase in interest rates on CV loans did not dampen growth as demand was influenced
more by the underlying economic growth. In terms of lending norms, the LTV ratios,
particularly for large fleet operators.
In late 2011, with increasing inflationary pressures and credit tightening measures
implemented by RBI, the interest rates for CV financing inched up to almost 12.5-13.0%
for new M&HCV financing. After being stable for almost a year, lending rates for CV
financing have also been on an upward trend prompted by credit tightening measures. But
delinquencies across asset classes didnt shown signs of deterioration and continue to
remain much below the levels reached during the 2008 meltdown. Although some of the
financers indicated the collections were increasingly becoming difficult and operators

especially with small fleets were servicing their obligations with a delay. Some of the
pockets like the mining belt were also affected.
During 2012, interest rates are around 12.5%, LTV is around 80% for FTU, 85% for retail
and 90 to 95% for strategic operators on composite assets. LTV for LCV (composite) is 85
to 87% and MHCV (composite) is 90%, and tenure for refinance cases being 2-3 years and
new vehicle finance being 3-4 years. Cases of refinance and used commercial vehicle
finance are on rise during this economic turmoil.
Reserve Bank's recent rate cut (by 50 bps to 8% in April 2012) is being seen positively by
the industry, especially as it signals the end of the continuous hikes in lending rates. More
than 90% of commercial vehicle sales in the country are financed and rate cut will help
boost sentiment, though not making much difference in EMIs.
Used CV finance market, which includes finance, availed at the time of purchasing a used
vehicle and also refinance taken with the CV as collateral is a market with large ticket
sizes, high yields and estimated to grow at a rapid rate. In comparison, the new CV finance
market, which deals exclusively with finance availed at the time of purchasing a new
vehicle is growing slowly.
In the case of LCVs, given the higher risk perception associated with borrowers belonging
to this segment, IRR is high (13-13.5%) because freight rate is not stable in this segment
and most of the operators are market load or operate on verbal contract and repossessing is
more difficult for this segment as operators dont have a fixed route (repossessing is not a
problem now a days as LCV have also started following a fixed route). Yields and margins


are higher on light commercial vehicle (LCV) financing than on heavy commercial vehicle
(HCV) financing because margins for operators are high as these vehicles have better
mileage (and freight rate is decided tonne wise), less maintenance cost as operate in not so
long distances. Therefore, increased risk can be mitigated by increased IRR(margins) in
this segment.


















3. TOTAL SALES VOLUME

Goods carrier segment

This industry is cyclical in nature as demand is driven by various factors such as growth in
industrial & agricultural production, freight movement, and share of roadways in freight
movement, changes in freight rates, fuel and tyre prices, government policies and ultimately
profitability of truck operators.
The replacement cycle for the CVs has relatively been longer in the past given that the road
transportation market is dominated by small truck operators who maintained old vehicles and
often purchased used trucks. The low financial capacity of the principal buyers is one reason
why replacement demand for trucks is low in India. Another hindrance to the demand for new
trucks as well as the adoption of modern technology in Indian CVs is the low freight rates.
But Improving conditions of state highways and development of expressways, a fast-growing
economy, coupled with increasing disposable incomes, will push the Indian CV market to enter
a rapid growth phase. Implementation of a regulation by the Government to limit the life of
CVs on roads, if brought into place, will further increase CV sales, as new vehicles would be
required to replace the old ones.
The movement in demand for CV closely follows the movement of economic growth. Past
trends show that the CV industry has a 4-5 year cycle.




The economic recession that prevailed during the early 1990s led to declining sales of CVs
in FY1992-93. When the economic scenario improved from FY1993 and infrastructure
development got a major boost, the industry posted a compounded annual growth rate
(CAGR) of 18% between FY1994 and FY1997. The industrial slowdown that affected the
freight demand as well as led to pressure on freight rates during FY1998-2001 coupled
0
1,00,000
2,00,000
3,00,000
4,00,000
5,00,000
6,00,000
7,00,000
8,00,000
Total Domestic Sales

with increase in the diesel prices (that accounts for over 50% of the transporter's operating
cost) had hit the profitability of operators and led to postponement of CV purchases.
Demand recovery in 1999-2000 was not sustained in 2000-01 and 2001-02.
However CV industry grew continuously from 2002-03 to 2007-08 at CAGR of 39.3%.
The need to replace the aged fleet and low interest rate available due to entry of new truck
financing companies led to strong replacement demand. Besides cost and availability of
finance, government policies on emission and overloading, increased momentum in
highway construction and better road conditions, and better operating economics of new
trucks (given that the diesel prices continued to rise but the competitive pressures
restricted the increase in freight rates) and scrapping of vehicles also influenced
replacement demand. Growth in value terms was also high due to demand for higher
tonnage vehicles and increase in price realizations. Inspite of a hardening of interest rates
since mid-2004, CV sales have increased at a healthy rate because of increased
replacement demand and increased demand for road transportation.
However in 2008-09, due to economic slowdown, reduced freight availability and lack of
financing there was decline in demand for CVs.
In 2009-10 sales increased by 34.6% as compared to lower base in 2008-09 because of
improved economic conditions and higher purchases.
Further in 2010-11, industry grew by 30.4% as compared to previous year driven by
significant recovery in economic and industrial activity, 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. However, the sharp growth in volumes that was

witnessed during the 6-7 quarters moderated to an extent because partial withdrawal of the
stimulus package; 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 cost of making the transition from BS II to BS III emission norms.
In 2011-12 the growth in the commercial vehicle (CV) sector slowed down. Rising interest
rates, slowing industrial output, substantial increase in vehicle prices coupled with high-
base effect of previous years were the main factors impacting growth in the sector. The
rising diesel prices have also impacted the operating economics, being a major part of a
freight operators cost structure. At the same time, freight rates on major routes have
remained relatively stagnant thereby indicating that fleet operators profitability and cash
flows are coming under pressure.
Several operators have postponed/deferred their expansion plans in view of rising interest
rates and expectation of slowing economic/industrial growth.
These factors combined with relatively subdued pick up in infrastructure spending have
started weighing on the demand for new CVs especially the heavy commercial vehicle
segment. In the recent months, the index of industrial production (IIP) has contracted
sharply and has registered one of its lowest growths in the past two years. There is a
definite slowdown in freight availability led by some of the core manufacturing sectors.
The impact is more visible in certain segments like container movement, mining,
automobiles (led by slowdown in passenger vehicle segment) and heavy industries such as
steel. Industrial growth entered the negative zone in Mar/12 & was -3.5% and +1% in
Apr/12. None of the broad sectors performed well in 2012.

Passenger Carrier Segment

Passenger carrier segments can act as a cushion during times of economic downturn, as this
segment is not highly correlated to economic growth and hence experiences lesser volatility in
demand. The demand for transportation is directly proportional to the growth of the economy,
mobility of population and other related factors.
The MHCV passenger carrier segment has accounted for a lower share of MHCV sales, mainly
because of a declining reliance on public transport, along with a corresponding rise in the
dependence on personal motor vehicle.
But in recent years many major cities have started to focus on public transport policy for
improved bus transport, including more and better buses. SRTCs like DTC have started
public private partnership by inviting private players to ply busses. This could drive bus
demand from SRTCs.

In the MHCV passenger vehicles segment, the demand for express, air-conditioned, high
quality buses is expected to grow at a faster rate. CV manufacturers are also taking initiatives
to offer fully built modern vehicles.
Presently there are some issues that deter the market of busses: old permits are not cancelled,
no strict regulations against old busses plying in rural regions.




4. SEGMENT WISE SALES


During the period FY1994-97, when the economy was growing at a healthy rate, LCV
sales had reported a modest compounded annual growth rate. From 1996-97 till 2001-02,
LCV sales remained low because of overall economic slowdown and low development of
SSIs and SMEs, only few foreign manufacturers were producing these vehicles (DCM,
Toyota and Mitsubishi) and were not able to provide good after-sales services. Then in
2002, priority sector lending policies (PSL) by government helped in growth of SMEs
0
50,000
1,00,000
1,50,000
2,00,000
2,50,000
3,00,000
3,50,000
4,00,000
4,50,000
5,00,000
s
a
l
e
s

year
LCV sales
MHCV sales

which in turn affected sales of LCVs in a positive way. From 2003-2007, LCV segment
grew because of rising demand of SCVs required for last mile connectivity. Then during
2008-09 recession, sales of LCV sales didnt fall as much as MHCV because of lower
freight volumes available in those times, the operators of MCV (such as TATA 1613)
segment shifted to ICV segment (like TATA 1109) which offered better mileage and could
carry almost equivalent load as MCV when over loaded.
Since the mid-1990s, the M&HCV industry witnessed sharp swings in sales. M&HCV
sales in the domestic market marked a growth of 27% during FY 1994-97 on account of
the increased focus on infrastructure development, and a steady growth in GDP. The
subsequent economic slowdown, however, took a heavy toll of domestic M&HCV sales,
which declined by 39% in FY1998 and by 10% in FY1999. In FY2000, the domestic sales
of M&HCV segment recovered and posted a growth rate of 34%. During FY2001,
M&HCV sales declined by 23% over FY2000. The trend somewhat reversed in FY2002
with volumes increasing by 10% during the year. From 2002-03 to 2006-07, HCV sales
increased manifold mainly due increased IIP and easy financing availability. Moderation
in truck purchases in 2007-08, due to higher interest costs.
After a sharp drop in volumes during quarter 2, 2008-09, the Indian CV industry operated
at record low capacity utilisation levels for the next few quarters, suppliers and OEMs
initiated several cost-cutting measures, the benefits of which along with the subsequent
volume growth in 2009-10 enabled the industry to report a sharp increase in profitability.
During this period, the industry also benefited from lower commodity prices and the fiscal
benefits extended by the Government. Although the entire goods carrier segment began to

fall in July 2008, the negative impact has been more pronounced on higher tonnage
vehicles due to the slow- down in mining and infrastructure activities. Within the
M&HCV, the 16 tonne-plus category was the worst hit from April to January 2009, falling
by 36%, whereas within the LCV segment, the 5-7.5 tonne category recorded the highest
decline of 18%. The sale of tippers and dumpers in the HCV segment was impacted by the
slowdown in mining activities due to the delay in awarding licenses and construction
activities. The sale of trucks in the 7-12.5-tonne category was mainly affected due to the
slowdown in retail activity, which was a result of weak consumer spending.
In 2009-10 last quarter and 2010-11, many transporters shifted to HCV segment with
higher payload (like Tata 3516 and even Tata 4018) seeing rosy market conditions (growth
in cement, steel and other industries). But in last quarters of 2010-11, Economy slowed
down a bit, truck (like Tata 3118, payload of 21 T) which was needed from long time to
fill the gap between payload of 2515 (21 T) and 3516 (24 T) grew.
In 2011-12, within the MHCV segment, MAVs, tractor trailers which tend to have higher
dependence on industrial activity have been impacted more, while ICVs have continued to
exhibit fairly stable growth. CV market grew in double digits, despite high interest rates, is
because of rising need of LCVs especially SCVs for last-mile connectivity inside cities.
2012 onwards, LCV sales will be driven by SCVs and ICVs whereas MHCV will be
affected by sluggish economic growth.





General trend over the years
With the countrys highway infrastructure improving and the hub-and-spoke model
gaining increasing acceptance in recent years, 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
0
50000
100000
150000
200000
250000
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
S
A
L
E
S

3 wheeler
SCV(<3.5 T)
LCV(3.5-7.5 T)
ICV(7.5-12 T)
MCV(12-16.2 T)
HCV(16.2-35.2 T)
HCV(>35.2 T)

M&HCV volumes, while in the LCV segment, SCVs are accounting for most of the
volumes.
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 years. In
India, a host of factors has been encouraging the use of MAV trucks. MAVs offer around
15-20% savings in cost per tonne km basis over standard trucks. The cost advantage
derives primarily from better fuel economy per unit of load, which is offset by lesser
number of trips and higher capital costs. In addition, one 44-tonne heavy truck, instead of
three 15-tonne trucks, means lower traffic congestion on the highways. With the financiers
offering lower margin requirements in certain cases, the higher cost of these vehicles that
was a deterrent earlier no longer remains so.
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. Hub and spoke means that the freight is generated from certain regional
cluster which is then transported to various trucking centers or hubs spread across the
country, where the goods segregated and transported across the various spokes and finally
through these spokes the goods are delivered to the end consumers. The sub-3.5T segment
has been able to increase its share of LCVs because of increased penetration of modern
retail even in rural and Tier 2 and 3 cities, and substitution of three-wheelers (3Ws) by

SCVs. The introduction of Tata Ace in May 2005 contributed towards the significant
growth of the sub-1 tonne segment. The macro-economic parameters favouring the growth
of the Small Commercial Vehicles (SCV) segment include infrastructure development,
upcoming Special Economic Zones (SEZs) across the country, and urbanization. As these
vehicles have relatively lower acquisition costs, the fleet operators may prefer them to
carry small cargo. The advantages for SCV owners vis--vis a traditional LCV owners are
lower buying cost , less operating expenses thereby higher profitability, easy availability
of finance, and attractive resale values. An SCV owner typically makes multiple trips with
lesser payload than an LCV owner, who gets maximum of two loads a day. Small
entrepreneurs buy Transport Service Truck for their own use (earlier this segment used to
hire vehicles) and the give them on hire when not in use. Increase in global crude oil prices
and developments in Compressed Natural Gas (CNG) distribution infrastructure is
expected to create a further demand for CNG-run vehicles especially, in the SCV and LCV
segment.
The CV industry draws its demand from the economy and hence is prone to 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. However, due to greater versatility of usage,
the LCV demand is less cyclical than the M&HCV demand. There is bound to be positive
growth in the LCV and HCV goods carrier segments and negative impact on the MCV
goods carrier segment.










PLIGHT OF TRANSPORTERS












LIVE MARKET SITUATION

The operating environment for fleet operators has been deteriorating over the past months. All
factors that influence the viability appear to be going against operators:
Increased vehicle cost
Increased tyre, fuel price
Increased financing cost
Increased permit tax and insurance cost
Sluggish economic growth

The sharp rise in overall cost of ownership combined with considerable rise in operating costs
and an almost stagnant or falling freight rates are displaying signs of pressures on fleet
operators. Freight rates across major routes have only risen to the extent of diesel price
increases and the rise has not been enough to compensate for the inflation in other operating
costs. Freight rates from Southern & Eastern regions have remained marginally weak, while
those from Northern & Western markets continue to hold on.






Operator comments
Worst days in market are at present after 2008. Difficult to maintain viability, either they are
selling some of their vehicles or diversifying their operations to more profitable ones.
Market load operators are feeling the pain, but contractual operators are also not left from
being affected from this phase. Their payments are getting delayed from the companies with
which they have contracts, so they are withdrawing the load they carry gradually.
Operators have also started negotiating on lower freight rates but still their 60% of trucks
remain idle for many days.

Dealers comments
SCV sales down by 25%., LCV sales down by 50% and MHCV sales down by even higher %.
One of the worst market scenario they have seen since 2008 recession. Many industries are
being shut temporarily to reduce operating cost.



















FUTURE OUTLOOK










1. ECONOMIC OUTLOOK

IIP recorded to be negative in Oct 2011 & Mar 2012 but seen +0.1 in Apr 2012.
As rupee depreciated in 2008-09 similarly rupee depreciated (dollar/rupee=57.32) in recent
days but has started appreciating because of clarity on implementation GAAR % reached
54.97.
IMD predicted 2012 to be a year of average rainfall.
Since slow down of 2008-09, interest rates have been on rise to curb inflation, with inflation
smoothened now and RBI accepting the fact that high interest are now hurting corporates,
RBI may reduce rates after some time.





Crude price has started decreasing because of slow economy world wide, demand has
decreased and there is overproduction, moreover market is now relaxed about the
geopolitical issues of Iran.
Natural Rubber price has increased manifolds in 2010 & 2011. Presently demand is less,
overproduction is being seen due to favorable climatic conditions and with crude rate
falling, the price of tyres will be moderated.
S&P, Fitch and Moody have warned India to downgrade its rating to junk status, with this
pressure Government has taken steps to revive economy:-like encouraging FIIs and
planning to push infra sector with the help of public private partnership which will GDP
grow (may be reach 7%) .
Market seems to be moderating around 2013 starting and will improve in late 2013.










2. INDUSTRY OUTLOOK

There was a tendency in India to operate CVs overloaded. They are becoming more
educated about the total cost of ownership things like quality, safety &reliability and
repair costs. The increasing awareness of Total Cost Operations (TCO) could push
reliability and maintenance costs more into focus. Indian market leader Tata Motors has
launched a commercial fleet management system called TRAKit for their range of
commercial vehicles. TRAKit is a low-cost solution tailored to Indian truck market
conditions and fleet ownership patterns, with which vehicle and fleet operators can stay
connected to their vehicles, while they are in transit.

With the expected further development of road conditions, more heavy-power engines will
be brought into application. The entry of major global original equipment manufacturers
(OEMs) has also played a critical role in broadening of this bandwidth, as global engine
power standards are higher than those used in the Indian market. Increasing competition in
goods transport has reduced the per mile-tons earnings of operators. Thus, the only vital tool
left to improve the operators' margins is to increase the number of trips between stations,
which would further increase the demand for high-power engines among consumers.





While in the past, international OEMs were unable to make a major dent in the domestic CV
market (characterized by a duopolistic structure), they have now ventured in through joint
ventures (JVs), thereby, raising the prospects of increasing competitive intensity. 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. However, 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. High volume in the Indian
CV market has been successful in gaining the attention of global CV majors, which is
reflected from the number of JVs, which have been signed between the domestic and global
majors.
o Daimler Chrysler's planned investment of INR 4,400 crore in the Indian market to
manufacture a full range of CVs (the vehicles will be manufactured under the brand
name 'Bharat Benz', which are expected to be rolled out by third quarter of 2012)
clearly indicates the potential of the Indian CV market and its expected growth in the
coming few years.
o Swedish CV manufacturer Scania announced its plans to invest Rs. 1.5 billion to set up
a manufacturing facility in India in the next one year. The proposed plant in Bengaluru
will roll out 2,000 heavy haulage trucks and 1,000 inter-city buses and coaches over the


o next five years. Currently, Scania has several sales and service points through Larsen &
Toubro.
o Volvo Eicher Commercial Vehicles (VECV), a joint venture between Volvo Group and
Eicher Motors, is constructing a new bus body manufacturing plant near Indore at Dhar,
Madhya Pradesh. The company plans to invest Rs. 1.25 billion for the first phase of
construction of the new plant, which is expected to start production by the second
quarter of 2013. Once fully operational, the new Eicher bus manufacturing plant will
have a capacity to manufacture 10,000 buses per annum.
o Next big global CV brand to be seen on the Indian highways will be the Hino brand
from Toyota.

Higher volumes of the CV market and entrance of global majors in the domestic market
have also triggered advancement in technologies used in power train and emission control
measures. Common Rail Diesel Engine (CRDe) for CV applications has recently been
introduced, with diesel injection pumps shifting to electric modules. The Indian CV industry
promotes Exhaust Gas Recirculation (EGR) as an alternative to curb emissions, whereas
Selective Catalytic Reduction (SCR) is yet to be part of Indian CV industry and is expected
to be implemented only by 2014. Taking a cue from developments for other alternative
drive-trains, hybrids and pure electric CVs have now registered their presence in the Indian
CV market, with domestic CV majors Tata Motors and Ashok Leyland showcasing their
newly-developed eco-friendly buses in recent auto shows held across the country. Reduction
in import duties on eco-friendly sub-components like batteries will help domestic

manufacturers bring down the cost of hybrid buses and make them business and
environment-friendly alternatives. Domestic manufacturers are focusing now on developing
individual niche products that might generate a certain level of demand in foreign markets.
Southeast Asia has been the focus of all export activities to date. The CV replacement cycle
is becoming shorter following the launch of technologically advanced vehicles (that offer
higher mileage and reliability) and regulatory pressures.

In recent years, however, there has been a growing trend of Indian manufacturers attempting
to expand overseas. This has been spearheaded by the two market leaders, Tata Motors and
Mahindra & Mahindra, who are focusing on markets which have trends in common with
India.

Sale of commercial vehicles (CV) in India is expected to grow at a CAGR of 15% over the
next five years from 0.8 million in 2011-12 to1.6 million units by 201617. Demand is
likely to be driven by the countrys economic progress, as is amply substantiated by the
rapid pace of urbanization in the country, with the likely emergence of more than six cities
(each with a total population of over 10 million) and 63 cities witha projected population of
more than1 million by 2025.

Sales Tax is to be phased out in coming years to welcome GST. The key initiatives that
could further trigger the growth of the industry includes, growth in third party logistics
(3PL). Increasing IT penetration will further improve the efficiency of the players by

enabling smooth movement of goods by online tracking, better cargo management and
record maintenance of huge cargo handled on daily basis.

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. 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. LFOs have witnessed a
gradual increase in the pie of vehicle ownership, while SFOs have been steadily losing share
in the economic downturn phases. Further, during the slowdown, several SFOs exited the
industry, owing to hardening interest rates and reduced freight availability. It was quite
difficult for SFOs to bear the capital costs of their assets. 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.

Correlation of the sales of CV with IIP and then in turn the correlation of the IIP with repo
rates, we see there is always a lag.

SCV may diversify for short term into LCV segment.

MHCV sale will see an increase from next year