Mumbai: Tata Motors Ltd is preparing to increase production of heavy-duty trucks and buses on expectations of higher demand for such vehicles after two years of decline, said two persons familiar with the auto maker’s plan. Lower inflation and a drop in the price of diesel after it was deregulated has triggered expectations of a pick-up in demand for heavy commercial vehicles, sales of which are a barometer for the larger economy.
Tata Motors plans to produce 7,800-8,000 units of heavy-duty trucks at its Jamshedpur facility in December—the highest in two years, said one of the two persons cited above. Both spoke on condition of anonymity. The company produced 6,400 units in November. It’s also looking at increasing capacity at its Lucknow plant, where it makes buses and trucks, to 4,600 units this month from 3,800 in October, said the person cited above. Sales of medium and heavy commercial vehicles (16-49 tonnes) turned the corner in June after declining for more than two years. In the seven months to October, heavy-duty truck sales expanded 7.38% to 102,000 units, according to the Society of Indian Automobile Manufacturers (Siam).
Over the same period, Tata Motors’ truck sales rose 4% to 59,177 units from a year ago. In an email response to queries from Mint, a spokesperson for Tata Motors said the company calibrates its production in line with demand. “It is true that over the past few months there has been an improvement in truck utilization; hence, the improvement in demand for medium and heavy commercial vehicles,” said the spokesperson.
The decline in truck sales over the past two years mirrored the larger economic downturn, which depressed growth in gross domestic product (GDP) to below-5% levels in the fiscal years ended March 2013 and March 2014. Growth is estimated at 5.4-5.9% for the fiscal that ends in March 2015, according to the finance ministry’s annual Economic Survey.
GDP growth was 5.7% in the quarter ended 30 June and 5.3% in the subsequent three months. With the exception of tippers, used in mining applications, truck sales have shown renewed momentum, said Subrata Ray, senior group vice-president at ICRA Ltd. Even so, industrial output remains sluggish.
The Index of Industrial Production (IIP) expanded 2.5% in September. In August and July, IIP expanded 0.5% and 0.4%, respectively. “Our interaction with fleet operators across the country suggests that capacity utilization of trucks has improved,” said Ray, adding that at least 60% of the operators are looking at new vehicles and another 20% want to replace an ageing fleet. A drop in diesel prices, which accounts for half of operating costs for a transporter, is a key driver for the renewed demand, he said. Diesel prices have dropped Rs.5.62 a litre since October. Despite the drop in fuel costs, freight rates have not softened. Contrary to the estimates of an expected 3-4% reduction in truck rental rates because of lower diesel prices, freight charges on 11 trunk routes, including Delhi-Mumbai, Delhi-Nagpur and Delhi-Chennai, remained unchanged between 1 October and 1 November, according to an Indian Foundation of Transport Research and Training (IFTRT) report. ICRA’s Ray says this is a reflection of the improvement in demand for freight services.
The upswing in truck sales is because of pent-up demand, said S.P. Singh, a senior fellow at IFTRT. Also, during the slowdown, many transporters preferred to scrap their old vehicles, which were costlier to maintain. “Close to 100,000 old trucks—17-20 years old—have been scrapped over the last four-five quarters as scrapping was more viable than maintaining an ageing truck,” said Singh, adding that the viability of operators will improve if economy gathers pace and diesel prices stay low. Tata Motors’ Jamshedpur plant can make 12,000 trucks a month and is operating at a little over half the capacity. With a gradual increase in production every month, the firm plans to reach a utilization level of 75% by March 2015, said the second of the two persons cited above. Low capacity utilization at its truck and bus plants (50%) and passenger car plants (25-30%) has led to losses in Tata Motors’ domestic operations.
In the September quarter, the loss from its domestic business widened to Rs.1,845.63 crore from Rs.803.53 crore in the year-ago period. Analysts say that while a pick-up in demand for commercial vehicles, a major margin driver for the domestic business, is important, a broad-based recovery in earnings will only come with an improvement in passenger vehicle sales. “Although margins will improve with a pick-up in volumes, we expect them to continue to lag peers, partly because of the company’s loss-making cars business,” Joseph George, an analyst at IIFL Ltd, wrote in a 17 November report.
The spokesperson for Tata Motors said while there is a sense that sales of medium and heavy commercial vehicles may have bottomed out, industry sales numbers are still much lower compared with two years ago. “We hope a stable government will drive reforms to promote investments, develop infrastructure, revive mining, and undertake tax reforms, etc., which will help sustain demand in the medium and long term, bringing back buyers,” she said.
Tata Motors plans to produce 7,800-8,000 units of heavy-duty trucks at its Jamshedpur facility in December—the highest in two years, said one of the two persons cited above. Both spoke on condition of anonymity. The company produced 6,400 units in November. It’s also looking at increasing capacity at its Lucknow plant, where it makes buses and trucks, to 4,600 units this month from 3,800 in October, said the person cited above. Sales of medium and heavy commercial vehicles (16-49 tonnes) turned the corner in June after declining for more than two years. In the seven months to October, heavy-duty truck sales expanded 7.38% to 102,000 units, according to the Society of Indian Automobile Manufacturers (Siam).
Over the same period, Tata Motors’ truck sales rose 4% to 59,177 units from a year ago. In an email response to queries from Mint, a spokesperson for Tata Motors said the company calibrates its production in line with demand. “It is true that over the past few months there has been an improvement in truck utilization; hence, the improvement in demand for medium and heavy commercial vehicles,” said the spokesperson.
The decline in truck sales over the past two years mirrored the larger economic downturn, which depressed growth in gross domestic product (GDP) to below-5% levels in the fiscal years ended March 2013 and March 2014. Growth is estimated at 5.4-5.9% for the fiscal that ends in March 2015, according to the finance ministry’s annual Economic Survey.
GDP growth was 5.7% in the quarter ended 30 June and 5.3% in the subsequent three months. With the exception of tippers, used in mining applications, truck sales have shown renewed momentum, said Subrata Ray, senior group vice-president at ICRA Ltd. Even so, industrial output remains sluggish.
The Index of Industrial Production (IIP) expanded 2.5% in September. In August and July, IIP expanded 0.5% and 0.4%, respectively. “Our interaction with fleet operators across the country suggests that capacity utilization of trucks has improved,” said Ray, adding that at least 60% of the operators are looking at new vehicles and another 20% want to replace an ageing fleet. A drop in diesel prices, which accounts for half of operating costs for a transporter, is a key driver for the renewed demand, he said. Diesel prices have dropped Rs.5.62 a litre since October. Despite the drop in fuel costs, freight rates have not softened. Contrary to the estimates of an expected 3-4% reduction in truck rental rates because of lower diesel prices, freight charges on 11 trunk routes, including Delhi-Mumbai, Delhi-Nagpur and Delhi-Chennai, remained unchanged between 1 October and 1 November, according to an Indian Foundation of Transport Research and Training (IFTRT) report. ICRA’s Ray says this is a reflection of the improvement in demand for freight services.
The upswing in truck sales is because of pent-up demand, said S.P. Singh, a senior fellow at IFTRT. Also, during the slowdown, many transporters preferred to scrap their old vehicles, which were costlier to maintain. “Close to 100,000 old trucks—17-20 years old—have been scrapped over the last four-five quarters as scrapping was more viable than maintaining an ageing truck,” said Singh, adding that the viability of operators will improve if economy gathers pace and diesel prices stay low. Tata Motors’ Jamshedpur plant can make 12,000 trucks a month and is operating at a little over half the capacity. With a gradual increase in production every month, the firm plans to reach a utilization level of 75% by March 2015, said the second of the two persons cited above. Low capacity utilization at its truck and bus plants (50%) and passenger car plants (25-30%) has led to losses in Tata Motors’ domestic operations.
In the September quarter, the loss from its domestic business widened to Rs.1,845.63 crore from Rs.803.53 crore in the year-ago period. Analysts say that while a pick-up in demand for commercial vehicles, a major margin driver for the domestic business, is important, a broad-based recovery in earnings will only come with an improvement in passenger vehicle sales. “Although margins will improve with a pick-up in volumes, we expect them to continue to lag peers, partly because of the company’s loss-making cars business,” Joseph George, an analyst at IIFL Ltd, wrote in a 17 November report.
The spokesperson for Tata Motors said while there is a sense that sales of medium and heavy commercial vehicles may have bottomed out, industry sales numbers are still much lower compared with two years ago. “We hope a stable government will drive reforms to promote investments, develop infrastructure, revive mining, and undertake tax reforms, etc., which will help sustain demand in the medium and long term, bringing back buyers,” she said.
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