India Ratings and Research on Wednesday said the Bharat Stage VI (BS VI) emission norms—which will come into force from April 1, 2020—could create short-term headwinds for the commercial vehicle (CV) segment, which is already experiencing lower sales.

Over the last few months, CV sales have fallen sharply—making it the worst-performing auto segment. Both retail and wholesales for the segment fell 23% in October.

“Considering the sharp YoY fall in the sales volumes of CVs since May 2019, the underwhelming pace of industrial activity and the higher cost of ownership of a BS VI CV, the implementation of BS VI could add to the sector’s woes,” India Ratings and Research said.

Given the excess supply and muted demand, the agency believes the pre-buying of BS IV CVs till the fourth quarter of FY20 is unlikely to be meaningful as compared with the earlier occasions when new emission norms had been implemented.

It said that total system capacity grew at 6% CAGR from FY13 to FY18. “The revised axle load norms led to inorganic capacity expansion in the system. Demand-side fundamentals, however, have remained fairly muted, as evident from the decline in the index of industrial production and the decrease in the aggregate volumes of manufacturing companies from 1QFY19,” Ind-Ra said. This has resulted in a demand-supply mismatch, it added.

India Ratings predicts that the demand for CVs will remain challenged in the near term impacted by slowing growth of industries and the economy in general, as well as by the impact of the extended monsoon on agricultural produce and rural demand.

Another factor that will impact CV sales in FY21 will be the moderate pre-buying of BS-IV. “Assuming customers anticipate a revival in the economy and are offered incentives in the form of discounts, the sector might witness moderate levels of pre-buying of BS-IV CVs. This, however, will lead to delays in the purchases of BS VI CVs post 1 April 2020,” it says.

This will also lead to risk aversion by financers creating funding challenges for owners. In an excess supply situation, wherein weak demand from the industry will not fully support the already built-in system-level supply, an expensive new BS VI vehicle would be quite unviable for financers, according to India Ratings.

“An under-utilised fleet with flat freight costs would put pressure on the debt repayment capability of fleet owners. Consequently, the lenders would exhibit risk aversion with respect to extending credit to buyers of BS VI vehicles by offering lower-than-usual loan-to-value and higher financing costs, especially to fleet owners whose operating cash flow would be inadequate to offset the debt repayments,” it said.

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