Indian Commercial Vehicle Industry

ICRA RESEARCH SERVICES Corporate Ratings Anjan Deb Ghosh +91 22 3047 0006 aghosh@icraindia.com Indian Commercial Vehicle Industry Near-term outlook remains subdued Profitability metrics of OEMs to remain under pressure Contacts: Subrata Ray +91 22 3047 0027 subrata@icraindia.com Shamsher Dewan +91 124 4545 328 shamsherd@icraindia.com Ashish Modani +91 020 2556 1194 ashish.modani@icraindia.com

What s Inside 1. Executive Summary 2. CV Industry is currently in the middle of a cyclical downturn phase Transporter s viability has been under pressure owing to low cargo availability, rising operating costs & subdued freight rates Financing environment remains resilient but delinquency levels rising 3. Export potential for Indian CV OEMs, their business plans and challenges Market potential for Indian OEMs in Latin America, Africa, ASEAN region & Russia OEM-wise business plans for international markets Foreign OEMs looking at exports from India Presence of Foreign OEMs in China and their investments plans 4. Segmental Analysis of Medium & Heavy Commercial Vehicles Segment-wise Growth Trends, Outlook & Market Share 5. Segmental Analysis of Light Commercial Vehicle Segment Segment-wise Growth Trends, Outlook & Market Share 6. Segmental Analysis of Bus Segment Segment-wise Growth Trends, Outlook & Market Share 7. Capital Expenditure & Investment Plans of OEMs 8. Key Takeaways from the Budget (2013-14) for Commercial Vehicle Industry 9. Duty Structure on automobiles in India & Trend in Excise Duty on Commercial Vehicles 10. Company Update Tata Motors Limited Ashok Leyland Limited Eicher Motors Limited SML Isuzu Limited ICRA Limited P a g e 2

INDIAN COMMERCIAL VEHICLE INDUSTRY Near term outlook remains subdued QUARTERLY REVIEW August 2013 ICRA RESEARCH SERVICES Executive Summary Cyclical phase continues amidst weak macro environment After experiencing a growth of over 30% during 2009-10 and 2010-11, the buoyancy in domestic CV industry has been on a wane since then. Slowing industrial growth and weakening investment sentiment across sectors has had a significant adverse impact on CV demand since the second half of 2011-12. While in 2011-12, the growth in the domestic CV industry slowed down to 18.2% vis-à-vis the prior year, the industry volume growth entered into the negative territory in 2012-13 as macro-economic environment continued to remain weak which coupled with high-base led to contraction of 2% in new CV sales. While in 2012-13, segment-wise performance was characterized by a wide dispersion in growth rates with the LCV segment witnessing a growth of 14.0% and M&HCVs declining by a sharp 23.2%, the current year has begun with broad base slowdown. In Q1 2013-14, LCV sales declined by 3.9% on a YoY basis largely led by slowdown creeping into the SCV segment, which has been bellwether for the industry for the past few years. The M&HCV also continues to bore the brunt of slowing industrial activity, weak investment sentiment and the impact of significant fleet capacity addition over the past three years. Within the M&HCV segment, the demand for the higher tonnage category of trucks such as tippers, tractor trailers and multiaxle vehicles (MAVs) was the most impacted in 2012-13 and it continues reflect similar trend in Q1 2013-14. Surplus fleet capacity and weak transporter viability post a relatively grim picture for near-term Our reality check with a host of dealers, transporters and financing institutions suggest that there no signs of revival yet with weak visibility on cargo availability being the key factor. From transporter s viability standpoint, the current CV cycle has been characterized by reduced cargo volumes, stiff competition owing to surplus capacities (M&HCV sales doubled from the lows of 2008-09, bringing down the average age of M&HCV population to a 10 year low) and rising operating costs, especially in wake of the recent hike in diesel prices. Although the freight rates have inched upwards following hike in diesel prices, the extent of rise in freight rates has not been adequate (on an aggregate basis) as it continues to be influenced by demand-supply dynamics in each market. As a result, capacity deferment and implementation of cost rationalization measures have been at the forefront for even the organized fleet transporters. That apart, high level of discounts, which have been steadily rising and now covering even the LCVs have also not been able to stimulate demand in a meaningful manner. Over the past 2-3 quarters, the financing environment of CV industry has also started showing signs of weakness, largely reflected by the rise in delinquency levels. The only silver lining so far has been that credit availability continues to remain stable. With some deterioration in asset quality indicators, credit evaluation has become somewhat stringent and so have the collection efficiency efforts. OEMs with new model introductions and expanding market coverage have been able to gain market share The fiscal 2012-13 was marked by a market share loss for industry leader, Tata Motors, especially in the M&HCV segment as some of the other OEMs have managed to offset the impact of slowdown to an extent with expanded dealership network and wider model offerings. More, specifically, Volvo Eicher JV gained market share (albeit on a low base) on back of increasing acceptability in the heavy-duty trucks segment, while Mahindra (erstwhile Mahindra Navistar) also performed better than the industry though on low volumes. Ashok Leyland s expanding market coverage outside the Southern region also helped in countering the impact of slowdown to an extent. Along expected lines, Ashok Leyland-Nissan JV made a good head start in the LCV segment with its first product offering Dost. With more models planned for launch and plans to set-up a Greenfield facility, we expect the JV to build upon its 7-8% market share in the LCV segment. In Q1 2013-14, Tata Motors however managed to recover some of its market loss of the prior year. While quarterly trends may be influenced by multiple factors like production trends, dealer inventory levels etc, we believe that competitive pressures are likely to increase going forward as some of the new OEMs scale-up their distribution reach. ICRA Limited P a g e 3

Exhibit: Trend in Aggregate revenues & weighted EBITDA margins 180,000 14.0% 160,000 12.0% 140,000 120,000 10.0% 100,000 8.0% 80,000 6.0% 60,000 40,000 4.0% 20,000 2.0% - 0.0% Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Aggregate Revenues of CV OEMs Aggregate EBITDA EBITDA Margin Source: Company Data, ICRA Estimates Profitability pressures unlikely to abate; product development-led initiatives remain core investment plans for OEMs With weak M&HCV sales and high levels of discounts being offered by OEMs, the profitability indicators of industry participants came under pressure in 2012-13. In our estimates, the EBITDA margins of key CV OEMs dropped by almost 300 bps to 8.4% in 2012-13. Although the trend was homogenous in nature, the extent of contraction varied across OEMs primarily reflecting the difference in product-mix, discounting strategies and share of other businesses. As operating cash flows came under pressure, credit metrics of some of the OEMs also deteriorated over the prior year. Compared to the prior slowdown, the industry participants however managed their inventory levels in a much better fashion as reflected by only a marginal rise in working capital intensity during 2012-13. To withstand the ongoing headwinds, OEMs have also resorted to production cuts in sporadic intervals and cost rationalization measures over the past few quarters. In our view, a meaningful recovery in the margins will however only be driven by gradual recovery in M&HCV sales accompanied with better pricing power. Having concluded capacity expansion plans over the past couple of years, CV OEMs are currently investing in developing new products, engine technologies and even pursuing diversification plans in other sectors. Most of the investments plans at present are not associated with capacity expansion (barring debottlenecking or investments for new product categories) and are continuing as per plans. For some of the OEMs, the investment plans are sizeable and in view of weak cash flow generation would require funding support to maintain a stable credit profile. Recovery in M&HCVs expected to be gradual and but in LCVs it may be faster on back of increasing penetration With weak macro-economic indicators and currently stretched viability for fleet operators, we expect M&HCV sales to remain weak in the near-term. The recovery prospects also appear to be gradual during the current down cycle given the surplus fleet capacity on ground which may put pressure on new CV sales even as freight availability improves. In our view, pick-up in cargo volumes and improvement in freight rates would be the key indicators to gauge early signs of improvement. So far, such a trend remains elusive. Accordingly, we expect M&HCV volumes to decline by around 5% in 2013-14 and start witnessing growth from 2014-15 onwards on back of low-base and expectations of improvement in economic environment. ICRA also expects GDP growth to gradually improve in 2013-14e compared to the previous year, which along with potential for further interest rate cuts would be positive for the CV industry. Additionally, revival in capex cycle and infrastructure development will be critical to sustain demand for CVs over the medium. The bus segment, which in general is not influenced by industrial environment could grow at a faster pace as it will start seeing benefits of the budgetary allocation towards JNNURM with specific plan to add 10,000 buses. In ICRA s view, the proposed order will be spread over the next two years and contribute significantly (~8%) to M&HCV bus sales in each of the next two years. Since the beginning of current financial year, the demand for LCVs has also started showing signs of fatigue largely on back of high-base effect and overall slowdown. Notwithstanding, the moderation in growth over the past few months, we expect the demand for LCVs would however continue to grow above industry average over the medium-term as it would need to match the extent of capacity added by M&HCVs trucks over the past few years. The growth will be led by SCVs, which are increasingly being favored over their three-wheeler counterparts and costlier LCVs on grounds of better power, maneuverability and cost economics. We also expect that replacement demand will also start contributing to the overall growth in LCVs. Assuming an average age for SCVs to be around seven years, many of the SCVs bought during 2005-06 period would get replaced with newer vehicles. Overall, while in the current year, LCV demand is likely to suffer some de-growth, ICRA expects growth momentum in the LCVs to remain strong over the medium term at around 11-13% CAGR. ICRA Limited P a g e 4

Exhibit 1: Trend in Domestic Commercial Vehicle Volumes & Growth Rates by segments Domestic Commercial Vehicle Sales (in Nos) YoY Growth (%) 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 LCVs Passenger Segment 27,832 26,952 34,413 44,816 48,868 48,153 17.2% -3.2% 27.7% 30.2% 9.0% -1.5% Goods Segment 188,080 173,747 253,364 317,030 411,415 476,734 11.6% -7.6% 45.8% 25.1% 29.8% 15.9% Total LCV Sales 215,912 200,699 287,777 361,846 460,283 524,887 12.3% -7.0% 43.4% 25.7% 27.2% 14.0% M&HCV Passenger Segment 38,647 34,892 43,083 47,938 49,882 46,553 34.7% -9.7% 23.5% 11.3% 4.1% -6.7% Goods Segment 235,935 148,603 201,861 275,121 299,334 221,710-4.4% -37.0% 35.8% 36.3% 8.8% -25.9% Total M&HCV Sales 274,582 183,495 244,944 323,059 349,216 268,263-0.4% -33.2% 33.5% 31.9% 8.1% -23.2% Total CV Sales 490,494 384,194 532,721 684,905 809,499 793,150-6.1% -21.7% 38.7% 28.6% 18.2% -2.0% Source: SIAM, ICRA Estimates What s inside? An update on current trends impacting demand for commercial vehicles in India Export potential for Indian Commercial Vehicle OEMs, their business plans & challenges Segment-wise performance trends in the domestic commercial vehicle industry ICRA Limited P a g e 5

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