STRICTLY PRIVATE AND CONFIDENTIAL

SIAM Conclave –
Looking ahead
April 2, 2008

India: Commercial vehicles

Demand drivers and forecasting

Ashutosh Goel
Vice President, Edelweiss
+91-22-2286 4287
ashutosh.goel@edelcap.com
Contents

Freight market – Overview

Goods M&HCVs - Demand cycles
Demand drivers
Issues in demand estimation
Forecasting methodology
Outlook 2008-09

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Freight market - Overview

Overall freight market is about 1500 BTKM

Railways and roads together account for over 95% of freight transportation

Railways overall share of freight is at about 25-30%

After losing share for decades, has gained a little in last 1-2 years

Railways share is higher in bulk commodities – such as coal (60%),

foodgrains, ores and minerals (60%), cement (40%), iron and steel (35%),
fertilisers (65%).
In discreet manufacturing - capital goods, consumer goods, etc. – road
transport has a distinct advantage, in terms of flexibility, door-to-door
delivery, predictable delivery schedules, and so on.
In agricultural goods – for short distance transport (e.g. sugarcane)
and perishables (fruits and vegetables), road transport has near
monopoly.

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Goods commercial vehicles – Demand cycles

1993-1996 boom followed by 2 years of intense pain

Recent times have been rather benign

2001-2006 boom caught everybody by surprise due to its longevity
Industry has escaped with mild shocks in 2005 and 2007

Trend demand growth is generally been in the range of 8% p.a.

Seldom anywhere close to it; makes things difficult
CAGR from peak to peak is 7.5%, bottom to peak is 20%
M&HCVs (goods)-domestic sales growth
What causes the volatility? 60.0

45.0

30.0

15.0
(%)

0.0

-15.0

-30.0

-45.0

-60.0
1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007-
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

M&HCVs (goods)- domestic sales grow th 19.8 41.9 34.7 21.4 -46.9 -9.7 41.4 -28.9 29.3 27.7 43.6 28.9 3.4 37.0 -8.2

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Commercial vehicles - Demand drivers

Freight availability - industrial production

While the linkage is obvious, CV demand has shown more volatility
than industrial cycle
Std Dev of IIP growth is about 3%; of MHCV sales growth is ~25%

Interest rates and credit availability

Profitability of transporters
Freight rates
Fuel prices and other costs

Road infrastructure
Competitiveness and market share vis-à-vis Railways

Replacement demand
Regulatory changes (entry norms, road worthiness, emission norms)
End-of-Life scrappage (is there anything like this, no data available)

However, in the ultimate analysis, CV sales growth is about freight availability

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Commercial vehicles – Forecasting approach and issues

Traditionally, demand forecasts for commercial vehicles are based on

estimating and forecasting total freight market in billion tonne kilometer
(BTKM)

Unit CV demand = (BTKMn – BTKMn-1)/(Avg payload x kilometers run)

Key issues
Lack of reliable and comprehensive data on fleet size and operations,
freight generated, lead distances, etc.
• The Carriage by Road Act, 2007 should help once implemented
Overloading can play havoc with any forecast
Fragmented ownership causes demand volatility outside of
fundamentals

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CV demand – exploring second order linkage with industrial production

Hypothesis – CV sales vary with the change in industrial growth rate, and not just
growth rate; in other words, acceleration or deceleration in growth

Explanatory variable – absolute change in the index of industrial production (IIP) –

Manufacturing component
Causal linkage – absolute change in industrial growth is a very good proxy for
incremental freight generated which in turn generates new M&HCV sales
For all its simplicity, the model explains the volatility in sales growth extremely
well
y = 8986.4x + 32063.8
R2 = 0.9
350,000
Issues 300,000
To incorporate – mining index 250,000

M&HCV sales
Uses unit sales and ignores tonnage 200,000
• However, the average GVW has 150,000
increased only 15% in 6 years 100,000
Agriculture commodities 50,000

Capacity utilisation and overloading - ? 0

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0
Railway market share Change in IIP-Mfg (level)

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M&HCV demand – Forecasts for 2008-09

Scenario 1 – Mfg IIP slows down further by 150bps to 8.0%

M&HCV sales growth – minus 6.8%

Scenario 2 – Mfg IIP slows down moderately by 50 bps to 9.0%

Growth – 3.3%

Scenario 3 – Mfg IIP stabilises at current 9.5%

Growth – 8.3%

Scenario 4 – Mfg IIP accelerates back to 10%

Growth – 13.4%

Positive support from

Mining, construction, infrastructure segments – tippers, mixers, etc.
• Dealer feedback across west, east and south India – share of these product segments
has doubled in 2007-08 over 2006-07
Impetus to industrial growth from fiscal stimulus provided by Budget and SPC
Negatives and drags
Continued slippage on overloading

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Commercial vehicles – Channel feedback

Dealers
Booming construction sector to provide
cushion against a soft cargo segment

Freight rates
1.60
Transporters
1.50
Freight availability is fairly good; profitability
is reasonable, though down from 2006-07 1.40

Rs/tkm
Freight rates are steady to gradually 1.30
improving Truck freight rates
1.20
Implementation of overloading ban is
patchy and slipping in certain rogue states; 1.10

while in some it is as stringent as before 1.00

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

2005-06 2006-07 2007-08

Source: Business Line

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Fleet utilisation – Demand vs supply

Fleet utilisation levels have been fairly steady in the past 3-4 years – reason
for lower volatility in demand, and no severe dent in transporter viability
Reflects consolidation in transport industry (in market operations though not
in ownership) and more informed buying decisions

Growth in fleet vs. freight

140
Inde x (Fleet) Index (Freight)
120

100

80

60
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
Note: Fleet index based on cumulative payload; Freight index based on agriculture
and industrial GDP
Source: Edelweiss research

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Commercial vehicles: Long term forecast

Medium to Long term trend growth rate 8-9% per annum for M&HCV;
slightly lower than industrial growth due to higher unit sizes

Demand drivers
Industrial growth: expected to stabilise at 9-10% p.a. over medium to
long term
Fleet renewal/upgradation driven by regulatory changes:
• Overloading (further clampdown), emission norms (Euro III/IV in 2010),
age/roadworthiness (spreading across cities)

Heavy gets heavier —M&HCV sales

Light gets Lighter — LCV sales
160,000 140,000
Me dium truc ks He a vy truc ks Light truc ks Sma ll truc ks
140,000 120,000
120,000
100,000
100,000

(Nos.)
80,000
(Nos.)

80,000
60,000
60,000
40,000
40,000

20,000 20,000

0 0
FY02 FY03 FY04 FY05 FY06 FY07 FY02 FY03 FY04 FY05 FY06 FY07

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THANK YOU!

12
Annexure

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Freight – Rail and road market share

Share of road and railways in total BTKM

Year Road BTKM % share of railways in total BTKM
1995-96 510.1 33.1
1996-97 542.7 32.3
1997-98 573.8 31.6
1998-99 580.4 31.0
1999-00 669.5 29.6
2000-01 700.4 29.0
2001-02 755.3 29.0
2002-03 824.8 28.6
2003-04 926.4 27.8
2004-05 1043.7 27.2
2005-06 1167.7 27.0
Source: CRISIL Research

Railways share of commodities transport

Year Coal Iron Ore Cement Foodgrains Fertilizers POL Iron & Steel
1997-98 66.4 69.7 44.9 13.5 74.6 37.5 44.0
1998-99 64.0 65.6 41.8 13.4 75.8 37.7 40.9
1999-00 65.7 67.0 43.4 14.8 78.6 36.0 39.7
2000-01 66.9 71.7 43.1 13.5 74.2 34.5 n.a.
2001-02 66.0 70.8 41.2 15.3 74.3 33.3 n.a.
2002-03 64.7 68.1 39.8 25.9 75.8 30.7 n.a.
2003-04 65.8 58.2 39.9 20.7 67.8 25.9 n.a.
Source: Ministry of Railways

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Freight market – BTKM estimation

Freight

Commodities Production (mn tonnes) Avg lead (km) BTKM % to total

Agricultural
Foodgrains and commerci 235 1,400 329 21.9
Sugarcane 257 300 77 5.1
Sugar 25 300 8 0.5
Cotton
Fruits & Vegetables and ot 178 300 53 3.6
Milk 100 200 20 1.3
Industrial
Fertiliser 25 850 21 1.4
Cement 150 450 68 4.5
Project goods 50 700 35.0 2.3
Minerals
Coal 400 600 240 16.0
Iron ore 50 400 20 1.3
Petro products 150 600 90 6.0
Bauxite 50 300 15 1.0

Metals
Steel, aluminium, copper, zin 40 900 36 2.4

Imports 150 800 120 8.0

Total 1,866 1,132 BTKM Avg lead 606.6 KM

Total estimated 1,500
Source: Edelweiss research

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