Restrictions doe to the second wave of the pandemic may limit sales growth of commercial vehicles (CV) to 23-28 per cent in 2021-22, compared to the earlier estimate of 32-37 per cent, according to a report by Crisil released on Monday.

Overall CV volumes are likely to be around 30 per cent lower in this fiscal year compared to 2019, the report added.

Volume growth hit a decadal-low last fiscal. Hit hard by the pandemic, CV sales in India plunged 21 per cent to 5,68, 559 units in 2020-21, against 7,17,539 in 2019-20, it said. The CV market saw two consecutive fiscals of steep decline, 29 per cent in 2020 and 21 per cent in 2021, following multiple headwinds such as revised axle norms, BS-VI transition and the pandemic.

While a sharp recovery was on the cards this fiscal, it will be constrained by a weak first quarter because of the second wave of the pandemic, it said.

According to Crisil, in April, freight rates fell around 20 per cent month-on-month even as diesel prices remained elevated, hurting fleet operators. With lockdowns becoming widespread in May, freight movement and consequently profitability of fleet operators would remain under pressure, weighing on demand at least in the first quarter, it said.

As lockdowns ease from the second quarter, freight demand and rates could normalise, aiding demand for CVs.

Hetal Gandhi, Director, Crisil Research, said, “MHCV (medium and heavy commercial vehicles) volume, which was hurt more in the past two fiscals, should see a strong 35-40 per cent growth this fiscal, driven by the government’s infrastructure thrust and revival in economic activity.”

He added that the light commercial vehicle (LCV) segment could grow 15-20 per cent given continued last-mile demand from e-commerce, consumer staples and the replacement market. Demand for buses – the segment hit hardest because of schools shutting down and lack of demand from state transport undertakings and corporates — should grow 67-72 per cent, but will remain at multi-year lows, he said.

“Overall, CV volume would still be around 30 per cent below fiscal 2019 level,” he noted.

Crisil also stated OEMs are unlikely to get a fillip from wholesale push because inventories at dealers were at fairly elevated levels of 35-40 days at end-March, against normal levels of 25-30 days.

Inventories had risen sharply in the second half, after near-zero at the beginning of the last fiscal, due to the BS-VI transition. However, one key positive that continues into this year would be faster revenue growth versus volumes. Better product mix due to higher sales of costlier MHCVs compared with LCVs would provide a fillip to average realisations, the report emphasised.

Raw material cost inflation, particularly in the form of steel prices, is expected to be largely passed on to consumers, similar to last fiscal, which saw 10-15 per cent price increases due to both BS-VI and commodity inflation, said Crisil.

“Higher revenue, coupled with improved capacity utilisation (up from around 38-45 per cent) and control on fixed costs, should help CV makers improve operating margin this year to around 7 per cent.

“Last year, players had eked out operating margin of 4.4 per cent despite decadal-low volume, due to significant operational improvements and reduction of fixed costs. But notably, margins this year would still be lower than the average 9.5 per cent achieved over fiscal 2016 to 2019,” said Naveen Vaidyanathan, associate director, Crisil Ratings.

With improved profitability, capex, which were cut sharply last year, should more than double this year to normal levels. Nevertheless, higher profitability would drive free cash flow generation and help lower debt, the rating agency said.

The forecast is predicated on expected recovery in demand from the second quarter with easing lockdowns and pace of vaccinations picking up. A third wave of Covid-19 could further dampen sentiment, and will be a key monitorable, too, it added.