Low truck rentals may dampen prospects for commercial vehicles

After falling in June, truck rentals continued to decline even in July. A marginal drop in diesel price aside, the 1-1.5% drop in July rentals mirrors weak demand for freight.

As the monsoon picked up in July, heavy rains disrupted movement of cargo. Also, the Indian Foundation of Transport Research and Training says that cargo arrivals by way of pulses, fruits and vegetables into markets dropped by about 25%. Meanwhile, manufacturing activity is yet to gain traction to a level that can improve utilization of the existing fleet, which will help sustain rentals.

As the monsoon picked up in July, heavy rains disrupted movement of cargo.

Further, recent data on the Index of Industrial Production, Services Purchasing Managers’ Index and the external trade suggests a very subdued economic recovery. A Citi Research report dated 29 July highlights that the pace of activity indicators has slackened in the first quarter of FY17, from the substantial pickup witnessed in the fourth quarter of FY16.

The June quarter results of infrastructure and capital goods companies have not been inspiring enough to have faith in the economic recovery. For instance, Larsen and Toubro Ltd’s performance portrays weak activity in infrastructure and construction, with a slowdown even in new orders.

If this trend extends for a couple more months, it will impact commercial vehicle sales too. Ashok Leyland Ltd’s sales for July have already been a dampener, coming in at 5% lower than the year-ago period. August sales are unlikely to see a big improvement as the monsoon continues through the month.

There’s more to this too. Comparison of truck sales to last year’s corresponding period is on a higher base, as fleet operators had advanced sales knowing that the new safety measures in vehicles would make trucks more expensive too. Also, the replacement demand that had pushed up truck sales in the year-ago period has now tapered off.

In the long run, traction in truck sales hinges mainly on rentals, which for now are stymied.

Source: http://goo.gl/dFUhYe