Multiple headwinds in the near term for heavy truck sector. Our analysis suggests that the domestic truck industry is likely to grow in low single digit during FY2018-20 driven by – (1) low road freight demand, (2) improvement in truck fleet utilization led by market share gains by large fleet operators and implementation of GST and (3) deterioration in profitability of the truck operators due to muted increase in truck freight rates. The truck industry could grow at a higher pace if replacement demand accelerates led by scrappage of old trucks but we believe the scrappage policy is unlikely to come in the next two years.
Truck demand is very sensitive to improvement in truck fleet utilization
We estimate the domestic truck demand will likely grow at 8% CAGR over FY2017-20 led by 7.5% CAGR in road freight demand and a 2% improvement in truck fleet utilization annually over this period. Our analysis of past 16-year data of the domestic truck industry indicates that the industry has grown at 7% CAGR over FY2000-16 driven by 8% CAGR in road freight demand and 1.5% annual improvement in truck fleet utilization. The implementation of GST poses a big threat to the truck industry as logistic sector will become more organized and toll booths at highways will become computerized, which could lead to faster improvement in truck fleet utilization. It is difficult to take a call to what extent truck fleet utilization will improve post GST but given the fragmented nature of the industry, we believe it is difficult for overall fleet utilization to improve beyond 80%. However, our sensitivity analysis to truck fleet utilization with domestic truck demand suggests that the domestic truck demand CAGR over FY2017-20 could vary from 4-13% CAGR depending on 1-3% annual improvement in fleet utilization.
Is 7-8% CAGR in road freight demand optimistic over FY2017-20?
Overall in the past three years, freight demand is muted with rail freight demand being flattish while road freight demand growing at 5% CAGR according to our estimates. Core sectors (steel, cement, coal, fertilizer, food grains), which form ~50% of road freight demand, are likely to grow at 3-5% CAGR over the next three years. We continue to assume road sector will take share from rail over the next three years as capacity expansion of railways lags behind the road sector. Although post implementation of DFC, rail may gain some share from road sector but we believe this event will likely play out post FY2020. So for road freight demand to grow at 8% CAGR over the next three years, core sector demand has to improve to 6-8% CAGR and road sector will need to take some market share from railways.
Replacement demand could get accelerated if scrappage policy is implemented
Government is working on implementing a policy to scrap old trucks (age higher than 15 years) from the population to reduce pollution. However, transport industry believes the pollution issue is a phenomenon in top 10-15 cities in India and vehicles are not the main source of pollution, so banning old trucks across India does not make sense. They believe small fleet operators do not have the financial strength to buy new trucks even if the government gives incentives to replace old trucks. Another issue is setting up of specialized automobile scrappage yards in India, which also requires investment and subsidy by the government. Given the multiple viewpoints on this issue, we believe the government will likely go slow on this policy and will not take harsh stance, which could be detrimental for the interests of small truck owners. We believe scrappage of trucks will happen on a phased manner in India.
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[Kotak] Automobiles, March 3, 2017 Multiple headwinds in the near term for heavy truck sector
