BS-VI implementation may create short-term headwinds for CV sales
Reveals study India Ratings and Research (Fitch Group)
India Ratings and Research (Fitch Group) believes the Bharat Stage VI (BS-VI) emission norms, which are scheduled to be implemented, from April 1, 2020, could create short-term headwinds for the commercial vehicle (CV) segment. Considering the sharp yoy fall in the sales volumes of CVs since May 2019, the underwhelming pace of industrial activity, and the higher cost of ownership of a BS-VI CV, the implementation of BS-VI could add to the sector’s woes. Furthermore, given the excess supply situation and muted demand-side fundamentals in the economy, the agency believes the pre-buying of BS-IV CVs till end-4QFY20 is unlikely to be meaningful as compared with the earlier occasions when new emission norms had been implemented. For fleet owners, the ownership of BS-VI CV would be credit neutral, as the benefits from fuel efficiency and maintenance would largely be offset by higher debt repayments.
Pre-buying Prospects Impaired by Excess System Capacity: Total system capacity grew at 6% CAGR from FY13 to FY18. Furthermore, the revised axle load norms led to inorganic capacity expansion in the system. Demand-side fundamentals, however, have remained fairly muted, as evident from the decline in the index of industrial production and the decrease in the aggregate volumes of manufacturing companies from 1QFY19. This has resulted in a demand-supply mismatch. Against this backdrop, a pick-up in CV sales during 3QFY20 and 4QFY20 due to pre-buying appears unlikely. Demand for CVs would remain challenged in the near term by the slowing growth of industries and the economy in general as well as by the impact of the extended monsoon on agricultural produce and rural demand.
Moderate Pre-Buying of BS-IV CVs Could Impact BS-VI CV Sales in FY21: Assuming customers anticipate a revival in the economy and are offered incentives in the form of discounts, Ind-Ra believes the sector might witness moderate levels of pre-buying of BS-IV CVs. This, however, would lead to delays in the purchases of BS-VI CVs post 1 April 2020. Hence, the sales of new BS-VI CVs could be lacklustre in 1QFY21 and 2QFY21, unless backed by an actual improvement in economic prospects.
Risk Aversion by Financers could lead to Funding Challenges for Owners of BS-VI CVs: In an excess supply situation, wherein weak demand from the industry would not fully support the already built-in system level supply, an expensive new BS-VI vehicle would be quite unviable for financers, according to Ind-Ra. An underutilised fleet with flat freight costs would put pressure on the debt repayment capability of fleet owners. Consequently, the lenders would exhibit risk aversion with respect to extending credit to buyers of BS-VI vehicles by offering lower-than-usual loan-to-value and higher financing costs, especially to fleet owners whose operating cash flow would be inadequate to offset the debt repayments.
Credit Neutral Impact on Fleet Operators: With respect to efficiency, a comparison of BS-VI CVs with BS-IV CVs reveals that a BS-VI CV might report better performance in terms of mileage and maintenance cost due to its on board diagnostic system (OBD). However, the higher debt repayments required for BS-VI CVs, due to its relatively higher cost, would offset the benefits of lower maintenance or improved mileage, leading to stable debt service coverage ratios. Overall, all other factors remaining the same, Ind-Ra expects that the buying of BS-VI vehicles to be credit neutral for fleet operators.