The Commercial Vehicle Downcycle Is Impelling Productivity Concerns

The tepid post-COVID recovery in commercial vehicles (CVs) is ironic to the claims of private capex revival along with a strong economy and the large government spending on highways.

In the second quarter of the financial year (FY) 2025, the leading players have reported 16.2% year-over-year (YoY) contraction in medium and heavy CV (MHCV) sales at 63,057 units. The declines are widespread spanning light and small CVs too. Companies attribute recent contraction to seasonal factors.

But the slackness has structural dimensions; the overall CV sales are 8.3% lower than the recent peak in the first quarter of FY19 and over the past 12 years it has remained flat (1% compound annual growth rate or CAGR, low growth period) following a robust 15% CAGR during the FY00-FY12 high growth period.  

The elasticity of MHCV sales to real GDP growth has fallen precipitously from 2.3x during FY00-FY12 to 0.2x during FY12-FY24, implying that every 100-basis point rise in real GDP now requires a tenth of CV sale growth than it did during the high growth period.

In fact, during the past five years the CAGR for LCVs and MHCVs – at -0.4% and -0.9% – corresponds to real GDP CAGR of 4.4%, implying negative elasticity. 

These are startling trends and deserve serious assessment. 

Substitution effect: Commercial vehicles versus railways

For MHCV (trucks), post-pandemic recovery has been sub-optimal with the current levels at 11.6% lower than the 2019 peak. Comparatively, over the past five years, the freight movement on railways expanded by 5.5% CAGR on total tonnage basis and 7.4% on net ton kilometres (NTKm). 

The superior performance of railway freight can be attributed to cheaper freight rate; while road freight rate increased by 5% CAGR over the past five years, rail freight remained nearly stagnant with 0.9% CAGR. 

In recent months all the three modes of cargo freight i.e road, port and rail have been slowing. Railway freight contracted by 6.9% YoY in August 24 after a decline of 3.9% in FY24. The combined freight handled by major and minor ports at 126.3 million tonnes has decelerated to 2.1% in August 24. 

Thus, while post-pandemic recovery resulted in stronger rebound in rail freight volume compared to roads, the recent contraction in truck sales appears to be on the back of the reinforcement of the substitution effect with the economic slowdown. 

This substitution headwind for MHCVs will likely persist as the freight moving capacity of the railway has expanded much greater than actual rail freight utilisation. 

Diminishing profitability favoured larger tonnage truck operators

We measure the pricing power of fleet operators as a ratio of freight rate to diesel cost using the average for Delhi-Mumbai, Delhi-Kolkata and Delhi-Chennai. The pricing power index has recovered from the COVID lows (December 2021) by about 30% but they are still 20-35% lower than the 2015 levels. For less busy routes the erosion of pricing power may have been greater. 

Consequently, small fleet operators, owning trucks till 25 tonnes were pushed out of business even as larger fleet operators who could afford 25-50 tonners could run viable business, backed by lenders. But considering even the higher tonnage sales, the average CAGR during FY12-FY24 stands at 1.4% versus 0.3% for the number of trucks sold. 

It is untenable to assume that faster growth in 25-50 tonne trucks has been due to upgradations of highways. Had it been the case, it would have reflected in a larger number of LCVs sold that subserve the freight hubs, which is not actually the case. 

The contraction in small-size trucks has led to job losses in transportation. RBI’s KLEMS and PLFS reports show that the proportion of salaried jobs in the sector has declined to 35% in FY24 from 43.3% in FY19. There has also been a drop in the proportion of casual work jobs (11.9% versus 14.3%). These have forced a rise in dependence on low quality self-employment (53.1% versus 42.4%) implying a rise of 1.5 million between FY19-FY24 to 13 million. Consequently, the real wage in the sector has contracted.

All factors considered, the key factors behind the deceleration in trucks sold are the structural slowdown in economic activities, private capex and global trade. 

On global comparison, the post-2012 CAGR growth of truck sales for the US (3.7%) has been higher than emerging economies like India (1.1%) and China (0.7%). This is a reversal compared to 2000-2012 when EMs (China 8.7%, India 14.8%) outpaced AEs (US 0.1% and Europe 0.8%). 

Low truck sales growth amid rise in govt capex on highways

Highway road length grew at 5.8% 12-year CAGR (FY24, 150k KM), higher than 3.3% CAGR during the preceding 12 years. The real spending by the Union government on road construction has catapulted by 27% CAGR to Rs 3.5 trillion (FY24) from the earlier phase at 1.2%. 

We measure the productivity of highways as ratio of MHCV (trucks) sales to highway length. Indexed to FY12, productivity in the low growth period declined to 0.5x in FY24. Comparatively, in the high growth period (FY00-FY12) it increased to 2.6x. 

Increase in road construction without increase in CV sales is symptomatic of the fact that the multiplier effects in the form of employment commensurate, household income generation and private capex have been inconsequential. 

The fall in toll collections (Rs 5.8 billion in the first quarter of FY25, -22% YoY) along with the decline in truck sales imply erosion of return ratios and debt service capabilities of road toll projects. Given that most of the recent road project expansions have been on Hybrid Annuity Model (HAM), a significant portion of the risk will fall on the governments, states or centre. For the non-tollable portion, the lack of positive economic externalities to the public at large is overwhelmed by the financial burden of such large capex. 

The 12 times rise in outstanding debt of NHAI (Rs 3.4 trillion in FY24) since FY15, its minuscule revenue (Rs 340 million) and large debt servicing (Rs 600 billion) are emblematic of diminishing productivity. 

Overall, the structural aspects of low pace of freight availability symbolising a weak economy, the substitution effects favouring rail over road transportation and large trucks over small trucks are likely to weigh on the productivity of large-scale highway construction. While highway construction is an important enabler, it appears to have become an end in itself, thereby creating large financial and economic drag. While reports suggest that the government is planning to make NHAI debt free by FY28, the shift in allocation to the Union Budget since FY22 amounts only to a shift in the accounting of billowing public debt, which will eventually fall on the tax-payers. 

For MHCV manufacturers, the recent contraction in sales could imply that the disproportionate gains in operating profits from selling premium large size trucks will start receding fast as they counter large-size fleet operators running excess capacity and who will demand greater discounts. 

Dhananjay Sinha is co-head of Equities and head of Research of Strategy and Economics at Systematix Group.