After languishing for a couple of years, commercial vehicle (CVs) sales are likely to perk up in 2015-16 due to a resurgence in economic growth, pick-up in industrial and agricultural activity, replacement demand from large fleet operators (LFOs) and better availability of finance.

For the medium and heavy commercial vehicles (MHCVs) segment, green-shoots are already visible in 2014-15 with sales picking up sharply in the second half compared with only modest growth in the first few months of the fiscal. Growth has been especially buoyant in the heavy trucks sub-segment (trucks greater than 25 tonnes gross vehicle weight) – sales volumes of these trucks rose by 69.3 per cent in the first 10 months of 2014-15.

Factors that initially buoyed this improvement in sales included large tenders floated by the Indian Oil Corporation for oil tankers and truck demand for transporting cement from Rajasthan to the National Capital Region for construction activities.

More importantly, fleet replacement demand from LFOs was spurred by better availability of freight (owing to an uptick in industrial growth), cut in excise duty rates till December 2014 (which led to a fall in vehicle prices) and an improvement in transporter profitability.

This buoyancy is also reflected in fleet utilisation rates, which have risen to 65-70 per cent in 2014-15 (as per our market interactions) from around 60 per cent in 2013-14.

Even spot freight rates rose by 4-6 per cent in the first half of 2014-15. Overall, we estimate sales volumes of MHCVs to increase by 18-20 per cent in 2014-15.

Of course, this upswing was over the low base of 2012-13 and 2013-14, when sales nosedived by nearly 25 per cent each year (in effect, volumes halved during those 2 years). But we expect this growth momentum to sustain and MHCV sales to vroom by 16-18 per cent in 2015-16 as well, propelled by a further pick-up in industrial growth (which could lift demand for multi-axle vehicles, tractor trailers and tippers) and continued uptick in replacement demand from LFOs. However, profitability of CV manufacturers will not see a complete recovery; it will continue to remain below the decadal average (8.0 per cent between 2004-05 and 2013-14) due to high discounts (10-15 per cent) owing to low capacity utilisation (although capacity utilisation is likely to improve to 54-56 per cent in 2015-16 from 47-49 per cent in 2014-15).

We believe that freight availability will improve on the back of a gradual revival in fundamental parameters such as the Index of Industrial Production (IIP) and construction and mining activity. Consequently, fleet utilisation may touch near normal levels of around 75 per cent by the second half of 2015-16, which is usually the time when most transporters make incremental truck purchases.

On the other hand, encouragingly for the industry, freight rates have remained steady since September 2014, despite a sharp drop in diesel prices, due to increasing demand for transportation services, led by freight generating sectors such as cement, iron ore, and passenger vehicles.

And, over the medium term too, with new road projects likely to be awarded leading to a boost in construction activity, fleet operators can look forward to higher transportation demand. Steady freight rates (despite the fall in diesel prices) and improving fleet utilisation rates will help transporters to improve their profitability.

While MHCV sales have perked up, light commercial vehicles (LCV) sales continue to languish in 2014-15 due to prolonged weak consumption expenditure and tighter lending norms for small-fleet operators and first-time users due to worries over asset quality. Sales may recover mildly in 2015-16 – we project 7-9 per cent growth – as caution in lending eases and consumption expenditure increases.

In the long term, pick-ups (2.0- 3.5 tonne gross vehicle weight) are likely to lead the pack in terms of sales, and grow at a faster pace than the overall CV market over the next 5 years as they offer the highest cash flow to equated monthly instalments and internal rate of returns.

The sub-one tonne segment (up to 2 tonne gross vehicle weight) will draw strength from growth in micro-trucks (500 kg payload), yet micro trucks are unlikely to eat into sales of small three-wheelers as was seen in case of mini trucks (750 kg payload) with large three-wheelers. A structural shift to heavier vehicles may impact growth in volume terms in both LCV and MHCV segments.

Thus, over the near term, sales of both MHCVs and LCVs are expected to gather pace due to economic recovery and rise in industrial activity.

What will, however, determine the extent of growth will be parameters such as increase in fleet utilisation rates (led by growth in freight availability and rates), easing of financial constraints and the timing, quantum, and distribution of monsoons this year.

The author is Director, CRISIL Research.