Driving optimism

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Q & A

Vinod Aggarwal,

MD & CEO, Volvo Eicher Commercial Vehicles Ltd (VECV).

Interview by: Anirudh Raheja

“We are optimistic about things soon returning to normal.”

Q. How has been the year till now for VECV?

A. The CV industry in FY2016-17 started off really well. The first quarter saw the industry clock bag good numbers. The second quarter turned out to be a bit slow. The month of October was better. CV sales were expected to make a comeback with good numbers in the third quarter. Due to demonetisation, the impact on the industry was immediate. Since small transporters and used truck business operates largely on cash, the impact of demonetisation was significant. Over a period of time, everyone will need to get used to using less cash. The industry will have to also align too. There was a sales impact in November and December 2016. A decline was registered against expected growth.

Q. What has been the impact of demonetisation on the CV industry?

A. If one looks at the growth swing, and the drop suffered by the CV industry, it is an estimated 25-30 per cent. Despite this, we are very optimistic. We are optimistic about things soon returning to normal. The transporter business is currently coming back to normal; most of the transporters have adjusted to using less cash. Due to reduction in consumption however, the overall economic activity has come down. This has impacted the CV industry. It will hopefully pick up soon and the CV industry will make a faster comeback. I don’t think it will take six months for the CV industry to return to normal. The government will also come up with more and more reforms, which may allow expenditure boosts.

Q. What about the impact of demonetisation on construction and mining truck segments?

A. Even in November and December 2016, construction and mining truck sales posted good growth. In the first nine months, construction and mining trucks grew 31 per cent. The drop in sales has been observed in the haulage segment. One of the reasons is the movement of industry higher tonnage trucks. This would not only increase the overall capacity, it will also reduce the number of trucks required for the movement of same quantity of goods. Two years back the 37-tonne segment did not even exist. Today, it does. This segment has seen healthy numbers this year.

Q. What was instrumental for the growth of construction and mining truck segments?

A. Investment in infrastructure. I think, the focus on infrastructure investment should continue. The government can spend more so that the overall economy becomes better. The Ministry of Road Transport and Highways has been bullish on building highways. It is a good sign. The fiscal deficit of Government of India looks to be within the range. This clearly indicates that the government is having a good control over its revenues. Based on it, there is a reason to believe that public spending will increase. The other major positive factor is the southward movement of interest rates. Increase in bank deposits and control on inflation has made it possible.

Q. LCV segment did not see good growth. Did demonetisation prove to be a double whammy?

A. I would say that demonetisation impacted this segment the most. Since this segment includes a lot of small fleet operators, it was badly affected due to demonetisation. LCVs and MCVs find use in rural areas. The rural economy was badly impacted due to demonetisation. The 5 to 15-tonne truck market is far from the peak growth period of FY2011-12. It was 105,000 units. Last year, the figures hovered around 72,000 units. This year, the growth is between 10 to 12 per cent. Due to demonetisation, growth dropped significantly in November and December 2016. The LCV segment is currently growing by just two per cent. This indicates that there is much to recover.

Q. When do you think, the industry can bridge or exceed the peak FY2011-12 figures?

A. In the heavy-duty truck segment, we had expected the numbers to come back. We may see peak levels of FY2011-12 being bridged or exceeded in FY2017-18.

Q. Stricter BSIV emission standards are around the corner. What technological and pricing changes do you foresee?

A. The advent of BSIV emission norms will turn the engines electronic. Keeping such developments in focus, we are continually bringing in new platforms. Costs will increase no doubt. Pre-buying of vehicles is expected to gain steam across segments in this last quarter of FY2016-17. The extent of it will need to be seen. It can affect the sales in the following quarter. The cost is likely to go up by seven to 10 per cent depending on the model.

Q. How important is the quality of fuel for BSIV emission compliant CVs?

A. The quality of fuel is important. As one goes higher up in emission control, the engines become more and more sensitive. As the industry progresses to BSIV emission standards, both the technologies, EGR and SCR will be used in CVs. It will depend upon the manufacturer.

Q. Which according to you will be the growth areas in FY2016-17?

A. If you look at VECV, the company has grown in all the segments. In the 5 to 15-tonne truck market, VECV continues to be one of the strong players with a 33 per cent market share. In the heavy duty truck segment of 16-tonnes and above, VECV has grown its market share to five per cent from the sub four per cent market share last year. VECV was not present in the 4.9-tonne segment earlier. In a short span of time, a presence in the segment was achieved. VECV now sells over 200 units per month. In the domestic market, Eicher grew at 12 per cent in the first nine months. This was against the industry declining by one per cent. In the bus segment, VECV grew at a rate of 16 per cent. Its market share in buses shot up to 16.5 per cent from 16 per cent last year. In the first nine months, the company sold 8,500 buses when compared to 7,300 units sold last year. VECV continues to be strong in the school and road permit (staff) buses. The company is currently executing good amount of bus orders from State Transport Undertakings (STUs).

Q. How is the VEPT engine plant supporting growth at VECV?

A. We are already exporting EuroVI base engines towards addressing Volvo Group’s European needs in the medium duty truck range, which is equivalent to India’s heavy duty truck range. We are also meeting the EuroIII and EuroIV needs of other Asian countries. The technology has also been adopted in our EuroIII and EuroIV compliant Pro 6000 and Pro 8000 series trucks, which are also make our heavy-duty range. As India progresses towards BSVI emission norms with a set deadline for 2020, the industry has to follow too. Copy paste of technology designed for Europe will not happen as India has different duty cycles. Us, having hands on EuroVI engines will definitely help. It will give us an edge. As far as the capacity is concerned, the VEPT plant at Pithampur in a single shift, is currently manufacturing 50,000 engines. The capacity can be scalabled up to 1,00,000 units annually as and when required.

Q. Hybrid and electric vehicles are gaining prominence in India. What are your thoughts?

A. In-line with the initiative of the Government of India, we are working on new technologies. We will be ready with a fully-electric bus this year.

Q. What benefits will GST offer to the CV industry?

A. It (GST) is a very forward looking reform. We are looking forward to its implementation. It will bring in a lot of efficiency in our distribution model. It will also cut down a lot of waste. Instead of operating from depots in every state in the country, we could simply operate from hubs built across four to five regions. GST can also reduce the cascading impact of taxes and there may be some benefit for the transporters. I think, they will be able to take credit for the GST which is paid on vehicle purchase. We will also be able to bring in more efficiencies in our buying process as the entire supply chain will become more efficient, and will be devoid of the cascading impact of taxes. I don’t think there will be impact on sales in Q4 of 2016-17 on account of GST as BSIV emission norms will come in April 2017. There is still some time before GST is implemented.

Q. Return on investment plays an important role. How will the move up to BSIV affect this?

A. Costs are definitely becoming a challenge in connection with rising regulatory implementations. Manufacturers have no choice but to pass on the costs to the consumers. Efficiency and productivity improvements have to continue. It is they that will continue to drive the costs down. In the case of ownership cost, the initial acquisition cost of the vehicle has an impact of only around 20 per cent. The impact of fuel cost is in the region of 45 per cent to 50 per cent. If the acquisition cost goes up by 10 per cent, the customer may be still able to gain on a net basis if productivity and fuel efficiency cost goes down by around the same per centage. We thus have to focus on driving modernisation and improve productivity. Even though the acquisition cost increases, it should not pinch the customer.

Trendline

If you look at VECV, the company has grown in all the segments.