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Sector update: Automobiles - Expert concall; Axle load increase – still seeking clarity

The government recently issued a notification effectively increasing the maximum axle load for vehicles by 15-36%. We organized a concall with Mr. Pradeep Singal, President, All India Transporters Welfare Association (AITWA), to understand the impact of the notification. AITWA is an industry association of truckers.

Key takeaways from the conference call:

Background

The government issued a notification increasing the axle weight carrying capacity by 15-36%. While the notification has been issued, there still seems to be confusion on whether the new norms apply to existing trucks or they will be applicable on a prospective basis (i.e for new trucks).

Still seeking clarity

While AITWA believes the notification refers to existing vehicles (i.e., with retrospective effect), it is still seeking clarity from the government in this regard. The association hopes to get clarity in a day or so.

Impact if retrospective – excess capacity in the system

If the move is retrospective, i.e., on existing trucks, it could lead to (a) an increase in system’s trucking capacity, particularly on long haulage routes. The association estimates there are ~1.5m trucks with national permits on which overloading is minimal, largely due to the high penalties (10x the price of the goods). An average 20-25% increase in tonnage could create excess capacity, which could meaningfully impact the demand for new trucks. (b) The benefit to transporters though could be limited, as higher capacity would force them to pass on the benefits from higher tonnage to consumers. Resultantly, overall freight rates could fall, benefitting consumers.  

Impact if prospective – small freight owners suffer, manufacturers benefit

However, if the norms are prospective, it could be positive for CV manufacturers, as large fleet operators would purchase new vehicles in order to be competitive. This would lead to meaningful replacement demand. However, the smaller freight operators (~80% of total transporters) could find their business models turning unsustainable, as they would not be able to compete with fleets purchasing new trucks.

Other points: (a) Prior to the notification, capacity utilisation levels in CVs had fallen substantially, with small freight owners coming under stress. CV demand sustained largely on account of GST input credit benefits and some demand from the infrastructure segment. (b) We could see some safety issues with respect to braking and tyres for older trucks if the benefit is for the entire fleet. (c) With the gap between the tonnage carried by rigid vehicles and tractor trailers contracting, due to increase in GVW carrying capacity, rigid vehicles are likely to be more economical compared to trailors.    

Clarity awaited, could have a meaningful impact on the sector.

The government’s decision could have a meaningful impact on the sector and M&HCV demand in the near to medium term. Retrospective implementation would be a negative for new vehicle demand whilst a prospective execution could be a positive. We await more clarifications on the issue. Currently, despite medium term concerns (rising early delinquencies, lower trucker profitability and potentially weakening capex cycle), we have an Outperformer rating on Ashok Leyland given the robust near term volume outlook.