Truck Sales and Truck Rentals Stray

After remaining firm for a year and half, truck rentals decline by 3%-5% in four weeks during Apr-May’07. The sales of new trucks also decline in Apr’07 because truckers are extra cautious in fleet expansion

Background

The High Speed Diesel (HSD) prices in last one year (Jun’06 to May’07) have, by and large, remained benign since the Public Sector Oil Companies had reduced the diesel price by Rupee one each per litre during Nov’06 and Feb’07, neutralising the Rupee-two-per-litre hike of Jun’06. However, other major operating cost component, i.e. tyres became costlier by 14% - 15% during Feb-Jun’06 and continue to remain firm. The diesel and tyres constitute 90% of the truck operating expense in 60:40 ratio.

In the aftermath of Supreme Court order (Nov’05) to stop overloading of trucks in accordance with provisions of the: Motor Vehicles Act, 1988, the truck rentals shot up by 18%-20% during Dec’05-Jan’06 and did not relent thereafter for 12-14 months i.e. till Mar’07. The increase in cargo movement, truck rentals and freight realisation has been backed by 10%-11 % growth in manufacturing sector, over 8% growth in GDP, 20%-25% rise in import-export trade and booming construction industry. All this contributed to the automobile industry witnessing over 30% growth in the sales of goods vehicles (5 ton-49 ton capacity). The high tonnage trucks/trailers, in fact, grew by over 75% during the last fiscal.

Truck Rentals/Freightage

Contrary to the expectations in many quarters, the current fiscal has begun on a negative note with truck rentals, after remaining robust for a long stretch of 18 months, dropping, due mainly to weak arrival of seasonal fruits, vegetables and wheat crop from different markets. Table-1 explains the truck rental movement during 5th Apr’07 to 5th May’07:

1.	As the Table-1 shows, after a year and half buoyant truck rental market, the 4-week period from 5th April to 5th May has witnessed a 3% - 5% drop in rentals on trunk routes.
2.	The resumption of overloading of trucks in most parts of the country has began to put pressure on truck freightage/rentals on medium and long haul, while the main reason for steep rise of 18%-20% in truck rentals during Dec’05-Feb’06 was sudden curb on overloading of trucks in the aftermath of 9 Nov’05 Supreme Court Order that directed strict implementation of the provisions of Motor Vehicles Act, 1988 and the offloading of cargo from trucks which were found to be carrying in excess of the prescribed weight limit. Slowly, the effect of Apex Court Order on trucking industry has started to evaporate, leading to the pre-Nov’05 situation.

 

Table-1 : Truck (16.2 Ton GVW) Rentals (Rs. Per round trip during 5th Apr to 5th May'07

Trunk Route	4-Week Rental Movement (Per Round Trip)		Truck Rental Decline (per Round Trip) Period 5th April-5th May 2007		Diesel Price (Per round trip) during April/May 2007
Round Trip / 9-ton payload	Freightage 5th April'07	Freightage 5th May'07	Rs.	%
Delhi-Mumbai-Delhi	39,500	38,300	(-) 1,200	(-) 3.04%	No Change
Delhi-Nagpur-Delhi	39,400	38,200	(-) 1,200	(-) 3.05%	No Change
Delhi-Kolkata-Delhi	44,800	43,600	(-) 1,200	(-) 2.68%	No Change
Delhi-Guwahati-Delhi	93,200	88,300	(-) 4,900	(-) 5.25%	No Change
Delhi-Hyderabad-Delhi	59,000	56,800	(-) 2,200	(-) 3.72%	No Change
Delhi-Chennai-Delhi	79,200	75,800	(-) 3,400	(-) 4.29%	No Change
Delhi-Bangalore-Delhi	64,200	61,600	(-) 2,600	(-) 4.05%	No Change
Delhi-Ranchi-Delhi	44,000	42,200	(-) 1,800	(-) 4.09%	No Change
Delhi-Raipur-Delhi	41,400	39,500	(-) 1,900	(-) 4.59%	No Change
Delhi-Kandla-Delhi	27,300	26,300	(-) 1,000	(-) 3.66%	No Change
Delhi-Bilaspur-Delhi	41,600	39,500	(-) 2,100	(-) 5.05%	No Change

 

3.	Despite double digit manufacturing growth, as also the robust GDP growth, phenomenal rise in import- export trade and booming construction industry, the unprecedented 75% growth in high tonnage trucks and multi-axle trailers has created more that adequate cargo haulage capacity. Therefore, excess truck fleet is chasing relatively less cargo, putting pressure on truck rental market for the last 4-6 weeks.
4.	The truck fleet has moved into and is presently engaged in intra-state haulage to ferry wheat procurement in various States, especially in Punjab, Haryana, Eastern Rajasthan, Western Uttar Pradesh and Madhya Pradesh. The truck rentals are likely to come under more pressure after the truck fleet reverts to move inter-state cargo. However, massive entry of multi-axle trucks in trucking business provides tensile strength to truck owners to take on lower truck rentals and still operate profitably in the present business scenario.

Truck Sales Reversal

As for the truck sales, the new fiscal has started off on a not-so-happy note. The month of Apr’07 witnessed a significant drop in sales for light trucks (5 ton - 7.5 ton capacity), intermediate trucks (7.5 ton -12 ton capacity), medium trucks (16.2 ton capacity) and multi-axle trucks (25.2 ton capacity), with an exception of multi-axle truck trailers (30 ton - 49 ton capacity). Table-2 explains the current market situation.

Table-2 : Truck & Trailer Sales - A Comparative Trend (April Month)

Sl. No.	Category/ Segment	Sales Fig in (Apr'06)	Sales Fig in (Apr'07)	Difference in nos.	% Difference
a.)	Light Commercial Vehicle (LCV) (5-7.5 ton capacity)	2,369	2,214	(-) 155	(-) 6.64%
b.)	Intermediate Comm. Vehicle (ICV) (8-12 ton capacity)	2,082	2,044	(-) 38	(-) 1.82%
c.)	Medium Commercial Vehicle (MCV) (15-16.2 ton capacity)	4,254	3,642	(-) 612	(-) 14.38%
d.)	Multi Axle Vehicle (MAV) (25.2 ton capacity)	8,654	7,709	(-) 945	(-) 10.91%
e.)	Multi Axle Trailer/ Vehicle (MAT) (30-49 ton capacity)	1,706	1,805	(-) 99	(+) 5.80%
	Gross Total : a.) + b.) +c.) + d.) + e.)	19,065	17,414	(-) 1,651	(-) 8.65%

 

a)	It is pertinent to note that Apr’05 truck sales aggregated 10,804 units, while Apr’06 sales at 19,065 units were up by a whopping 76.46%. However, in Apr’07, the sales are down to 17,414 units, dropping by 8.65% from the sales figure of April’06.
b)	In Table-2, it can be seen that except for multi-axle trailers, all other four segments have recorded negative growth. Even in case off multi-axle trailers, the meagre 5.80% growth is a pale shadow of the growth pattern of last year.
c)	In addition, the most growing segment of 3-axle multi-axle truck (25.2 ton capacity) has registered a negative growth after their continuous growth for the last 4-years.
d)	The steep increase in truck auto finance rates during Jan-Mar’07 by banks and NBFCs has been one of the factors in putting brake on the sales of commercial vehicles during Apr’07. However, the most important factor depressing the market sentiment has been the truckers sensing the uncertain availability of cargo in these months due to seasonal factors. The present high auto finance interest rates hovering around 6.5%-7% as against 4.5% last year should not act as a major deterrent in expanding their fleet if there is a corresponding freight growth, because the multi-axle goods vehicles still enjoy higher margins in comparison to traditional 2-axle 16.2 ton trucks due to lower cost of operation.

 
Migration to High Tonnage Trucks

In last 4-5 years, the trucking industry has been in the expansion mode inducting multi-axle high tonnage trucks and moving away from traditional 2-axle 16.2 tonner trucks. This has been accompanied with buoyant truck rentals despite steep increase in diesel price since Jun’02 from Rs. 14.90 per litre to Rs. 30.45 per litre due to rising crude oil price from $22 per barrel to $66 per barrel in the global market. This was largely possible due to robust industrial growth & rising GDP. Table-3 explains the growth scenario in truck sales in 2005-06 and 2006-07:

Table-3 : Truck & Trailer Sales - A Comparative Trend (Annual)

Sl. No.	Category/ Segment	Volume/ Capacity	Sales Fig in 2005-06 (Apr-May)	Sales Fig in 2006-07 (Apr-May)	Difference in nos.	Per Cent Difference
a.)	Light Commercial Vehicle (LCV) (5-7.5 ton capacity)	Numbers	40,024	36,410	(-) 3,614	(-) 9.02%
		Ton (million)	0.200	0.182	(-) 0.018	(-) 9.02%
b.)	Intermediate Comm. Vehicle (ICV) (8-12 ton capacity)	Numbers	32,200	36,187	(-) 3,987	(+) 12.38%
		Ton (million)	0.290	0.326	(+) 0.036	(+) 12.38%
c.)	Medium Commercial Vehicle (MCV) (15-16.2 ton capacity)	Numbers	61,989	63,087	(+) 1,098	(+) 1.77%
		Ton (million)	0.930	0.946	(+) 0.016	(+) 1.77%
	Sub-total: a.)+b.)+c.) (LCV+ICV+MCV)	Numbers	133,213	135,684	(+) 2,471	(+) 1.85%
		Ton (million)	1.420	1.454	(+) 0.034	(+) 0.024%
d.)	Multi Axle Vehicle (MAV) (25.2 ton capacity)	Numbers	74,054	122,509	(+) 48,455	(+) 65.43%
		Ton (million)	1.851	3.063	(+) 1.212	(+) 65.13%
e.)	Multi Axle Trailer/ Vehicle (MAT) (30-49 ton capacity)	Numbers	11,080	25,579	(+) 14,499	(+) 107.27%
		Ton (million)	0.499	1.151	(+) 0.652	(+) 107.27%
	Sub-total: d.)+e.) (MAV+MAT)	Numbers	85,134	148,088	(+) 62,954	(+) 73.95%
		Ton (million)	2.350	4.214	(+) 1.864	(+) 79.32%
	Gross Total : a.) + b.) +c.) + d.) + e.)	Numbers	218,347	283,772	(+) 65,425	(+) 29.96%
		Ton (million)	3.770	5.668	(+) 1.898	(+) 50.34%

 

1.	The above table clearly explains that the major expansion in the truck fleet came from the high tonnage 25-49 ton capacity vehicles only after the impact of Supreme Court on truck freight market was severely felt. This resulted in the generation of unprecedented demand for movement of high density cargo like cement, steel, fertiliser, food grain, pulses, timber, iron ore etc.
2.	During last quarter of fiscal 2006-07 (Jan-Mar’07), the extra demand for these vehicles was more on account of availing Depreciation Allowance under the Income Tax Act to neutralise the business profit by the corporates and big transporters. The truck market had, in fact, begun to saturate as truck fleet expansion was indiscriminately more than the pro-rata increase in cargo availability in last six months of the fiscal 2006-07.
3.	As a whole, the goods carriages have added almost 1.9 million ton cargo haulage capacity in one single year, which works out to 50.34% growth. In case of multi-axle vehicles, the capacity accretition has been phenomenal to the extent of 73.95%. At present, there are 1.2 million goods vehicles in 25 ton - 49 ton capacity range with National Permits operating on medium and long haul, carrying and moving bulk cargo akin to the Railways in size, dimension and weight. In fact, 25 ton - 49 ton capacity multi-axle goods carriages enjoy almost 40%-50% less per ton per km capital and operating cost in comparison to traditional 16.2-tonner 2-axle trucks and hence have been main source of higher profits and realisation to truckers in last 4-5 years.

 
With phenomenal fleet expansion having already taken place, the drop in truck sales during April 2007 is a sign that the trucking industry is heading towards uncertainty. This may result in unsettled and uncertain truck rental market in coming months, which will have bearing on the growth of truck sales. It cannot be ignored that there has been a massive expansion in the national fleet. Truck operators have, perhaps, overreacted in the buoyant scenario contributed by healthy economic growth and hectic pace of commercial, industrial and construction activities. Already, the vehicle manufacturers have started offering discounts on sale of different categories of trucks/trailers to retain the market share and it is expected that the banks/NBFCs with support from vehicle manufacturers will soon fall in line to reduce interest rates on truck finance. After 4-5 years of uninterrupted buoyancy, the truck sales are beginning to enter the uncertain phase, unless the economy moves into the next gear very fast. The continuing high level of inflation in the economy is another negative factor, which is likely to impact the growth of truck sales. Higher inflation translates into lower disposable incomes in the hands of common people and, consequently, lower demand for various manufactured items and commodities.