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The intense second wave of Covid-19 afflictions and consequent lockdowns will limit growth in the domestic commercial vehicle (CV) sales volume to 23-28 per cent this fiscal, compared with 32-37 per cent expected prior to its onset, Crisil said on Monday.

Volume growth had hard-braked to a decadal low last fiscal. But according to the ratings agency, credit metrics of CV makers are expected to improve as margins expand on better capacity utilisation and product mix.

The CV market saw two consecutive fiscals of steep volume decline (29 per cent and 21 per cent in 2020 and 2021, respectively), following multiple headwinds such as revised axle norms, BS-VI transition, and the pandemic.

While a sharp recovery from the lows was on the cards this fiscal, it will be constrained by a weak first quarter because of the second wave of the pandemic, the agency said in its report that accessed the CV market in India.

In April, freight rates fell 20 per cent even as diesel prices remained elevated, hurting fleet operators. With lockdowns becoming widespread in May, freight movement, and consequently the profitability of fleet operators, would remain under pressure, weighing on demand at least in the first quarter.

As lockdowns ease from the second quarter, freight demand and rates could normalise, aiding demand for CVs.

Says Hetal Gandhi, director, Crisil Research, "MHCV volume, which was hurt more in the past two fiscals, should see a strong 35-40 per cent growth this fiscal, driven by the government's infrastructure thrust2 and revival in economic activity. LCVs could grow 15-20 per cent given continued last-mile demand from e-commerce, consumer staples and the replacement market. Demand for buses - the segment hit the hardest because of schools shutting and lack of demand from state transport undertakings and corporates - should grow 67-72 per cent, but will remain at multi-year lows. Overall CV volume would still be 30 per cent below fiscal 2019 level."

OEMs are unlikely to get a fillip from wholesale push because inventories at dealers were at fairly elevated levels of 35-40 days as of end-March (against normal levels of 25-30 days). Inventories had risen sharply in the second half after near-zero inventory at the beginning of last fiscal due to the BS-VI transition.

However, one key continued positive this year would be faster revenue growth versus volumes. Better product mix due to higher sales of costlier MHCVs compared with LCVs would provide a fillip to average realisations. Raw material cost inflation, particularly in the form of steel prices, is expected to be largely passed on to consumers, similar to last fiscal which saw 10-15 per cent price increases due to both BS-VI and commodity inflation.

Says Naveen Vaidyanathan, Associate Director, CRISIL Ratings, "Higher revenue, coupled with improved capacity utilisation (up from 38 per cent to 45 per cent) and control on fixed costs, should help CV makers improve operating margin this year to 7 per cent. Last year, players had eked out operating margin of 4.4 per cent despite decadal low volume due to significant operational improvements and reduction of fixed costs. But notably, margins this year would still be lower than the average 9.5 per cent achieved over fiscal 2016 to 2019."

With improved profitability, capex - cut sharply last year - should more than double this year to normal levels. Nevertheless, higher profitability would drive free cash flow generation and help lower debt. This would support an improvement in credit metrics - interest cover should improve to 3.6x from a low of 1.5x last fiscal, Crisil said.

The forecast is predicated on recovery in demand from the second quarter with easing lockdowns and pace of vaccinations picking up. A third wave of Covid-19 could further dampen sentiment, and will be a key monitorable, too.