Is commercial vehicle turnover in June for real or just an optical illusion?
live bse live  nse live Volume Todays L/H More   Vaibhav Agrawal, Chief Investment Officer, Teji Mandi  June sales data of commercial vehicles (CV) came as a positive surprise. CV demand improved on a monthly as well as annual basis. Both the major CV players - Tata Motors and Ashok Leyland - recorded volume growth of 146 percent and 174 percent YoY, respectively, for the month. Positive momentum was boosted as the economy is recovering with rising factory output and the accelerated pace of infra projects. A Long Way To Go  At the micro-level, mobility indicators are showing signs of improvement. Daily e-way bills have recovered up to 40 percent month-on-month (MoM) in June, freight rates are up by 10-14 percent, and fleet utilisation levels improved from 65 percent in April-May 2021 to 75 percent in June 2021. There has been a sequential rise in demand for CVs as the economic condition is restoring fast. However, CV makers are still facing challenges in terms of profitability due to the rising commodity prices. Pure CV player Ashok Leyland's gross margin declined by 580 bps YoY, impacted by commodity cost. Discount levels also remain extensively high to push sales, further contributing to margin erosion. Ashok Leyland succeeded in restoring a part of their margin loss by adopting extensive cost-cutting measures and taking price hikes. The company achieved volume growth of 73 percent YoY in the March-ending quarter. Its EBITDA was up 192 percent YoY to Rs 534 crore, and adjusted PAT stood at Rs 210 crore as against a loss of 11.8 crores in Q4FY20. Stress Persists at Ground Level  Despite the improved sentiments among the CV players, it is far too early to forecast the turnaround. Industry dynamics continue to remain under stress at the micro-level. And it will require a prolonged recovery cycle to get the industry out of the woods. Transport opportunities were reduced for truck drivers in June due to factory closures and delay in payment clearance from customers. Apart from that, profitability levels have reduced due to the combination of stagnant freight rates and higher fuel costs. On top of that, many drivers chose to migrate to their villages. It resulted in business opportunity losses and lowered fleet utilisation levels for the operators. NBFCs at a Receiving End  Lower fleet utilisation and below-par freight rates have added to the financial vulnerability of truck drivers, especially for the smaller operators with a lower capital base. Under stress from all quarters, a large number of small fleet operators are likely to miss out on their EMIs. Covid-19 cases among family members, increased savings and reduced income are the few reasons cited for non-payment. The stress is further highlighted by the sharp fall in collection efficiency (CE) of vehicle financiers. Their collection efficiency had dropped in the range of 50-80 percent in May from 95 percent+ level in March. Given the possibility of the third COVID-19 wave, the future continues to remain uncertain for lenders. Closing Comments  The rising demand for commercial vehicles is a relief. Monthly sales data for June has continued to be on an upward trajectory. However, the plight of truck drivers is telling a different story. Fleet operators continue to face troubles at the micro-level as freight rates and fleet utilisation levels remain muted. Hence, it is likely that the recent surge in CV demand is due to the pent-up demand. Going ahead, the threat of an impending third Covid-19 wave is still intact. In this context, the CV industry has a long way to go before they can breathe easily. : The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.