ICRA expects PV volume growth to improve in FY 2017

The Indian PV industry’s domestic volumes are expected to grow by 8.5%-9.5% in FY2017, supported by the return of the first-time buyers, replacement demand owing to the large base of FY2011/FY2012. While there are some concerns related to 2%-4% additional infrastructure cess, however, the expected pickup in the economy, favourable monsoon as well as benefits of the 7th Pay Commission, will support overall growth in the domestic PV sector, says ICRA in its study on PV and CV Industry.

Over the last two fiscals domestic PV growth has primarily been supported by new launches in compact/super compact cars and compact UV segment. While the share of the overall UV segment has remained flattish (~21%), the compact UV segment has grown sharply– consequently, share of compact UV, in the overall UV sales, has increased to 63%.

Considering aggressive launches in the Compact/Super Compact and the UV segment, we expect both these segments to outperform overall industry growth in the near to medium term.

The industry’s profitability metrics however face several headwinds like (a) increased product development expenses, (b) increase in employee expenses, (c) likely sustenance of discounts-led sales push resulting from restricted pricing power  and (d) commodity price volatility.

“Over the medium term duration, ICRA expects the PV industry to revert to a volume CAGR of 9-10% (domestic + exports)”.

After witnessing sharp contraction in sales between FY 2013-14, the M&HCV (Truck) segment of the domestic CV segment registered a growth of 21% and 32% respectively in FY 2015 and FY 2016. The growth in M&HCV Truck sales has been driven by replacement-led demand by large fleet operators following two years of fleet deferment and improving viability for fleet operators on declining diesel prices and firm freight rates.

“While diesel prices have corrected by almost 20% since September 2014, freight rates on the other hand have declined by only 4-5%. Our channel check with fleet operators confirms that while demand for road logistics has improved and this along with reduction diesel prices has come as a relief for the logistics industry”.

“We expect M&HCV (Truck) sales to register a growth of 13-15% in FY 2017e, on back of replacement-led demand, some pre-buying ahead of the complete roll-out of BS-IV norms (by April 2017) and gradual improvement in viability on back of lower diesel prices and pick-up in consumption-driven sectors”.

In contrast to the M&HCV Trucks, the demand for LCV Trucks has continued to remain weak during most part of FY 2016 amidst surplus capacity issues, tight financing environment on back of rising delinquency levels and rural slowdown. However, since second half of FY 2016, the segment started witnessing recovery albeit on a low base. This we believe is driven by replacement demand (following three years of declining trend) and some improvement in viability.

We expect that the demand in LCV is likely to improve in FY 2017 on back of expectation of replacement-led demand, some pre-buying ahead of the implementation of BS-IV norms (by April 2017) and gradual improvement in viability on back of lower diesel prices (SCV freight remain relatively sticky) and pick-up in consumption.