Rlys’ freight push puts the squeeze on truckmakers
The volume growth of MHCVs contracted to 5 per cent in the two months to July after growing by 20-30 per cent in the past two fiscals
This is likely to impact truck manufactures including Ashok Leyland, Tata Motors and Eicher Motors. Indian railways cut freight rates on select items in order to capture market share in the white goods space where it has a relatively low penetration. According to some cement producers, a few freight operators have cut their freight rates to match those of the railways.
The combined impact of aggressive stance of railways and shrinking profitability of cargo operators is likely to be felt in the volume growth of MHCVs in FY17 and FY18. MHCV volume fell in July by 8 per cent for the first time since August 2014 when it dropped by 4 per cent. In the past two fiscals, truck volume growth picked up after operators, who were expecting an improvement in the freight rates and an overall uptick in the economic growth, replaced their old fleet with new vehicles. However, the change in the strategy by railways may discourage them from increasing the fleet size further.
Analysts estimate MHCV volume growth to taper down to 12 per cent and 7.5 per cent for the current and next fiscal, respectively as against 15 per cent and 10 per cent growth forecast previously. This is the second time in the past six months that projected volume growth has been revised downward. Prior to the beginning of the current fiscal, the Street was factoring in volume growth of more than 25 per cent.
A lower MHCV volume growth will affect Ashok Leyland, Tata Motors and Eicher Motors. Tata Motors is the market leader in MHCV market with a share of 59 per cent followed by Ashok Leyland at 31 per cent and Eicher at 5 per cent in the June 2016 quarter in more than 16 ton category.
However, Ashok Leyland will be the most affected since its proportion of truck volume in total sales volume is the highest among peers. Some brokerages have downgraded Ashok Leyland and have pruned projected earnings per share by 5-6 per cent to Rs 5.2 for FY17. Ashok Leyland’s stock has historically delivered one of the best returns in the first two years of the demand uptick. The stock has underperformed the BSE Auto index in the past two months after outperforming the index by a wide margin for the last years.