16.Edelwiss MrAshotosh Goel[1]

8/6/2019 16.Edelwiss MrAshotosh Goel[1]

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S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L

India: Commercial vehicles

Demand drivers and forecasting

Ashutosh Goel

Vice President, Edelweiss

+91-22-2286 4287

[email protected]

SIAM Conc lave

Look ing ahead

Apr i l 2, 2008


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Contents

Freight market Overview

Goods M&HCVs - Demand cycles

Demand drivers

Issues in demand estimation

Forecasting methodology

Outlook 2008-09


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Freight market - Overview

Overall freight market is about 1500 BTKM

Railways and roads together account for over 95% of freight transportation

Railways overall share of freight is at about 25-30%

After losing share for decades, has gained a little in last 1-2 years

Railways share is higher in bulk commodities such as coal (60%),foodgrains, ores and minerals (60%), cement (40%), iron and steel (35%),

fertilisers (65%).

In discreet manufacturing - capital goods, consumer goods, etc. roadtransport has a distinct advantage, in terms of flexibility, door-to-doordelivery, predictable delivery schedules, and so on.

In agricultural goods for short distance transport (e.g. sugarcane)

and perishables (fruits and vegetables), road transport has nearmonopoly.


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Goods commercial vehicles Demand cycles

1993-1996 boom followed by 2 years of intense pain

Recent times have been rather benign

2001-2006 boom caught everybody by surprise due to its longevity

Industry has escaped with mild shocks in 2005 and 2007

Trend demand growth is generally been in the range of 8% p.a.

Seldom anywhere close to it; makes things difficult

CAGR from peak to peak is 7.5%, bottom to peak is 20%

What causes the volatility?M&HCVs (goods)-domestic sales growth

-60.0

-45.0

-30.0

-15.0

0.0

15.0

30.0

45.0

60.0

(%)

M&HCVs (goods)- domestic sales grow th 19.8 41.9 34.7 21.4 -46.9 -9.7 41.4 -28.9 29.3 27.7 43.6 28.9 3.4 37.0 -8.2

1993-

94

1994-

95

1995-

96

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08


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Commercial vehicles - Demand drivers

Freight availability - industrial production

While the linkage is obvious, CV demand has shown more volatilitythan industrial cycle

Std Dev of IIP growth is about 3%; of MHCV sales growth is ~25%

Interest rates and credit availability

Profitability of transporters

Freight rates

Fuel prices and other costs

Road infrastructure

Competitiveness and market share vis--vis Railways

Replacement demand

Regulatory changes (entry norms, road worthiness, emission norms)

End-of-Life scrappage (is there anything like this, no data available)

However, in the ultimate analysis, CV sales growth is about freight availability


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Commercial vehicles Forecasting approach and issues

Traditionally, demand forecasts for commercial vehicles are based onestimating and forecasting total freight market in billion tonne kilometer(BTKM)

Unit CV demand = (BTKMn BTKMn-1)/(Avg payload x kilometers run)

Key issues

Lack of reliable and comprehensive data on fleet size and operations,freight generated, lead distances, etc.

The Carriage by Road Act, 2007 should help once implemented

Overloading can play havoc with any forecast

Fragmented ownership causes demand volatility outside offundamentals


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CV demand exploring second order linkage with industrial production

Hypothesis CV sales vary with the changein industrial growth rate, and not justgrowth rate; in other words, acceleration or decelerationin growth

Explanatory variable absolute change in the index of industrial production (IIP)

Manufacturing componentCausal linkage absolute change in industrial growth is a very good proxy forincrementalfreight generated which in turn generates new M&HCV sales

For all its simplicity, the model explains the volatility in sales growth extremelywell

y = 8986.4x + 32063.8

R2 = 0.9

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

Change in IIP-Mfg (level)

M

&HCVsales

Issues

To incorporate mining index

Uses unit sales and ignores tonnage

However, the average GVW has

increased only 15% in 6 yearsAgriculture commodities

Capacity utilisation and overloading - ?

Railway market share


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M&HCV demand Forecasts for 2008-09

Scenario 1 Mfg IIP slows down further by 150bps to 8.0%

M&HCV sales growth minus 6.8%

Scenario 2 Mfg IIP slows down moderately by 50 bps to 9.0%

Growth 3.3%

Scenario 3 Mfg IIP stabilises at current 9.5%

Growth 8.3%

Scenario 4 Mfg IIP accelerates back to 10%

Growth 13.4%

Positive support from

Mining, construction, infrastructure segments tippers, mixers, etc. Dealer feedback across west, east and south India share of these product segments

has doubled in 2007-08 over 2006-07

Impetus to industrial growth from fiscal stimulus provided by Budget and SPC

Negatives and drags

Continued slippage on overloading


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Commercial vehicles Channel feedback

Dealers

Booming construction sector to providecushion against a soft cargo segment

Transporters

Freight availability is fairly good; profitabilityis reasonable, though down from 2006-07

Freight rates are steady to graduallyimproving

Implementation of overloading ban ispatchy and slipping in certain rogue states;while in some it is as stringent as before

Truck freight rates

Freight r ates

1.00

1.10

1.20

1.30

1.40

1.50

1.60

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Rs/tkm

2005-06 2006-07 2007-08

Source: Business Line


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Fleet utilisation Demand vs supply

Fleet utilisation levels have been fairly steady in the past 3-4 years reasonfor lower volatility in demand, and no severe dent in transporter viability

Reflects consolidation in transport industry (in market operations though notin ownership) and more informed buying decisions

60

80

100

120

140

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

Index (Flee t) Index (Freight)

Growth in fleet vs. freight

Note: Fleet index based on cumulative payload; Freight index based on agricultureand industrial GDPSource: Edelweiss research


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Commercial vehicles: Long term forecast

Medium to Long term trend growth rate 8-9% per annum for M&HCV;slightly lower than industrial growth due to higher unit sizes

Demand drivers

Industrial growth: expected to stabilise at 9-10% p.a. over medium to

long termFleet renewal/upgradation driven by regulatory changes:

Overloading (further clampdown), emission norms (Euro III/IV in 2010),age/roadworthiness (spreading across cities)

Heavy gets heavier M&HCV sales

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

FY02 FY03 FY04 FY05 FY06 FY07

(Nos.)

Medium trucks Heavy trucks

Light gets Lighter LCV sales

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

FY02 FY03 FY04 FY05 FY06 FY07

(Nos.)

Light trucks Small trucks


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THANK YOU!


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Annexure


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Freight Rail and road market share

Share of road and railways in total BTKM

Year Road BTKM % share of railways in total BTKM

1995-96 510.1 33.1

1996-97 542.7 32.3

1997-98 573.8 31.6

1998-99 580.4 31.0

1999-00 669.5 29.6

2000-01 700.4 29.0

2001-02 755.3 29.0

2002-03 824.8 28.6

2003-04 926.4 27.8

2004-05 1043.7 27.2

2005-06 1167.7 27.0

Source: CRISIL Research

Railways share of commodities transport

Year Coal Iron Ore Cement Foodgrains Fertilizers POL Iron & Steel

1997-98 66.4 69.7 44.9 13.5 74.6 37.5 44.0

1998-99 64.0 65.6 41.8 13.4 75.8 37.7 40.9

1999-00 65.7 67.0 43.4 14.8 78.6 36.0 39.72000-01 66.9 71.7 43.1 13.5 74.2 34.5 n.a.

2001-02 66.0 70.8 41.2 15.3 74.3 33.3 n.a.

2002-03 64.7 68.1 39.8 25.9 75.8 30.7 n.a.

2003-04 65.8 58.2 39.9 20.7 67.8 25.9 n.a.

Source: Ministry of Railways


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Freight market BTKM estimation

Source: Edelweiss research

Freight

Commodities Production (mn tonnes) Avg lead (km) BTKM % to total

Agricultural

Foodgrains and commerci 235 1,400 329 21.9

Sugarcane 257 300 77 5.1

Sugar 25 300 8 0.5

CottonFruits & Vegetables and o 178 300 53 3.6

Milk 100 200 20 1.3

Industrial

Fertiliser 25 850 21 1.4

Cement 150 450 68 4.5

Project goods 50 700 35.0 2.3

Minerals

Coal 400 600 240 16.0

Iron ore 50 400 20 1.3

Petro products 150 600 90 6.0

Bauxite 50 300 15 1.0

Metals

Steel, aluminium, copper, zi 40 900 36 2.4

Imports 150 800 120 8.0

Total 1,866 1,132 BTKM Avg lead 606.6 KM

Total estimated 1,500


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16.Edelwiss MrAshotosh Goel[1]

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