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Last Updated : Jun 15, 2016 01:43 PM IST | Source: CNBC-TV18

Tata Motors expects 14-15% CV volume growth in FY17

With macros finally showing signs of recovery, one sector most sensitive to the economic cycle -- commercial vehicles -- appears headed for growth.

With macros finally showing signs of recovery, one sector most sensitive to the economic cycle -- commercial vehicles -- appears headed for growth.

Market leader Tata Motors expects volumes to grow 14-15 percent in fiscal year 2016-17, with growth led by sales by both light commercial vehicles (LCVs) and heavy commercial vehicles (HCVs) as well as the trucks and tippers.

The first two saw double digit growth for the first time in several quarters during the January-March period, said Ravi Pisharody, the company's Executive Director - Commercial Vehicles.

The medium & heavy commercial vehicles (M&HCV) space, which accounts for 60-70 percent of Tata Motors' CV revenues, is headed for a new peak this fiscal, he added.

But for a full-blown recovery in CV sales, the financing environment needs to improve, Pisharody maintained.

Below is the verbatim transcript of Ravi Pisharody’s interview with CNBC-TV18's Sonia Shenoy and Latha Venkatesh..

Sonia: I wanted to first start off by asking you about the trends in the commercial vehicle (CV) space which have been looking good over the last few months. What are you picking up in terms of a genuine demand growth and geography wise where are you seeing most amount of demands now?

A: The CV space really consists of a mix of at least four or five different segments. So, the heavy commercial vehicle (HCV) and light commercial vehicle (LCV) group is one segment. The medium and heavy commercial vehicle M&HCV group is bigger segment and then you have segments like the buses and passenger group. So, the M&HCV segment which is the trucks and tippers of 16 tonne and above. This actually contributes almost 60-70 percent of the total market revenue. So, this is the one which is really quite significant. It has been growing quarter-on-quarter (Q-o-Q) for almost now seven or eight quarters and we are seeing even in this quarter which is the April-June quarter which is typically the lowest period in the year we are seeing growth in excess of 20 percent over a relatively high base because the base of 2015-16 was close to the previous peak of 2011-12. So, on such a base to have a growth of 20 percent plus is pretty strong and it is just not replacement buying anymore.     There are some clear economic drivers. The other segments which is the LCV and buses albeit on a low base but we are now seeing growth which is double digit growth after a long time. For the last 4-5 months we are seeing growth even in those segments.

Latha: You spoke about this 20 percent growth in the M&HCV segment. Does this also come with better margins since there is a continued downturn in commodity prices?

A: Our margins are stable because while the commodity prices have been stable the competitiveness in the market is still very high and that has to do with the fact that in the M&HCV space there are now 7-8 players and almost all of them have now been in the business or in the country for three year plus. So, there is overcapacity which is not going to go away so easily even in a strong market. So, margins are stable, we can see that in our results of the January-March quarter which were announced. We are managing to hold on to our margins despite the competitiveness and of course the softer commodity prices are helping.

Latha: What is the capacity utilisation in the sector and in Tata Motors itself?

A: Again I will have to talk sectorally but the M&HCV segment which is the business we may take out of two plants in Jamshedpur and Lucknow we are currently running at almost 80-85 percent capacity utilisation depending on how you define, but my sense is that the industry capacity utilisation is much higher than 50-55 percent because a lot of new capacity has come in, in the last five years. New companies as well as old companies expanded. So, a lot of new companies have not been able to realise their projected numbers. So, that is the situation as far as capacity utilisation goes.

Sonia: You spoke about competition that is very high currently. How is the discounting situation, is it still very high and what are the average levels on which discounts are given?

A: Discounts are still high. As I said with soft commodity prices since there are many plants or many companies not yet at critical marks there is an attempt to gain some volumes even at lower margin. I would say that discount levels are in the region of 10 percent. They keep fluctuating month-on-month (M-o-M) but I would say it is in the region of 10-12 percent.

Latha: So, do you see these discounts falling as the demand picks up in the order you say, 20 percent?

A: Yes, that is the part unfortunately not falling. Unlike the previous recovery in 2010-11 where they have basically 3-4 players and there was a clear improvement in the discounting scenario when the market picked up. We don't see that now. That is partly because of the profile of the buyer. Most of the buyers today are not single truck owners or small owners. They have big fleets. So, they are aware of the situation. It is a pretty strong biased market. If somebody places an order for 100 vehicles spread over six months he is making sure he is getting the best discount available. So, that is not responding so much, so the demand upturn is still fairly high.


Sonia: Can you give us a sense of what the next couple of years or rather one year could look like because FY16 is a year that is best forgotten. For Tata Motors itself the CV sales volumes were up only three percent in FY16. What do you think the growth could be for the industry and for Tata Motors in CV over the next two years?

A: FY16 was actually better than the previous two years. The three percent growth actually marks the fact that in M&HCV the growth was in excess of 25 percent. At total CV level which is something which probably only Tata Motors has this range starting from 0.5 tonne small vehicle to the big truck. At total CV level the growth in M&HCV was offset by the continuing decline in LCV segment for the first 7-8 months of the year.

But if you look at the January-March quarter CV of Tata Motors we have grown by almost 15-120 percent. So, now that the LCV recovery has also started we have seen in the last two months also our growths are in the region of 14-15 percent. We expect that to continue because we have now seen the steady trend on the recovery in the LCV and buses also. So, in a sense on a lower base LCV growth will continue.

M&HCV growth is expected to continue and we have a particular factor this year which is going to help demand which is that the regulations demand that all vehicle production will switch to BS-IV norms from April 1. While this has been happening over a period of time with the bigger cities but the big trucks are mainly registered under what we call All India Permit. So, on the M&HCV less than five percent of the trucks are today under BS-IV. So, because of the cost impact of BS-IV which comes around April 1 we sense that there will be some advance buying in the second half of the year.

So, clearly FY16-17 will benefit from that but that obviously will result in FY17-18 being somewhat slow. So, in the longer term it doesn't make much difference but for the current year that is a positive driver. But overall whenever there is a recession and there is a comeback we do get reminded of the fact that the India growth story from a longer term standpoint is still intact. So, from a 3-5 year horizon we do continue to see a 10-15 percent growth.

Sonia: Is it safe to assume that in FY17 one could see about a 14-15 percent growth because of the low base and because of buying on account of the BS-IV norm changes?

A: Yes, it will be at a higher rate than the medium term compound annual growth rate (CAGR).

Latha: Does that National Green Tribunal (NGT) rule impact you or make a positive for you in anyway, the fact that they have banned vehicles over 10 years old in Kerala. If that is something that catches on in other states should you expect demand to be boosted?

A: If I am not mistaken the NGT Kerala ban has been for the moment stayed by the High Court. So, that is still not applicable. In Delhi we already see that, in NCR region there are restrictions around plying diesel vehicles in the city which means there is a demand for Compressed Natural Gas (CNG) vehicles in and around Delhi city and also the ban around older vehicles. So, that does trigger off a bit of demand but the way it works is people who drive old vehicles are not the people who buy new vehicles. Because there is a new replacing cycle where a new vehicle buyer typically after 4-5 years passes on his truck to somebody else but overtime if it is enforced over a longer period yes, it might     result in some demand but more importantly what the industry is saying is rather than banning new vehicles which are meeting BS-IV norms or the latest emission norms there is a lot more older vehicles in the environment which is probably where the government should first target.

Latha: Just a perspective, what was the highest CV output, in which year was it 2011-12, how much are we in terms of a distance from reaching that high and when do you see that happening? Basically 100 percent.

A: Normally when people ask this question it is for M&HCV in particular because that is the one which is really cyclical. So, M&HCV the last peak was 2011-12, I forgot the exact number but 2015-16 fell short of that peak by probably 5-10 percent and the growth forecast I just spelt out it looks like 2016-17 will spell a new peak for M&HCV.

If I look at total CV because in 2012-13 while M&HCV started falling the other sector still held out. So, the previous peak was between 2011-12 and 2012-13. We are still far away from that because the small vehicles are still nowhere near - I am talking about the HCV and the pickup, even with the 10-15 percent growth this year are nowhere near that peak because then you have to talk about financing. The financing environment which was more liberal four years ago has become much tighter now but M&HCV clearly we are heading for a new peak this year whereas for total CV it will have to wait for some time.

Latha: Wait how much, as in 20-30 percent off the peak?

A: Yes, should be still 20-30 percent off the peak. So, while there are some signs of growth we need to see it more sustained and we also need to see the loan to vehicle ratios because the smaller buys really depend on financing loan. Today the loans are not crossing 80-85 percent, in a few cases 90 percent whereas at its peak the loans were in the region of 90-95 percent. So, if the financing environment and the financer appetite improves only then we can really see the LCV segment returning to growth, I mean returning to a level which is higher than the previous peak.

Latha: So, should we expect a 10 percent margins for the standalone business in the next year?

A: That is something we don't talk about. We try to manage our margins the best. The margins have improved last year and we hope we can hold it at those levels.

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First Published on Jun 15, 2016 10:47 am
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