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Despite high financing penetration in the commercial vehicle space, the tight liquidity impacted the road logistics sector, prompting the transport community to put their vehicle replacement or addition plans on the back burner, writes Subrata Ray, Group Head – Corporate Sector ratings, ICRA Ltd.

The government’s move to replace high denomination currency notes effectively withdrew 85% of the currency in circulation in November, resulting in disruption in liquidity. This impacted cash transactions and hurt demand as consumers were forced to minimize discretionary spend during last two months. This apart, some of the segments which have traditionally been dealing largely in cash, like real estate, transportation and small businesses faced disruptions due to non-availability of adequate cash. The rural market, which has a higher propensity of cash transaction, faced a stronger cutback in consumer spend, which directly impacted segments like two-wheelers, jewellery, tractors and other consumer discretionary items. In the longer term, the drive against black money, coupled with implementation of GST is expected to shrink the unorganized segments of the industries, which often depended on tax evasions for viability, benefitting the organized sector players.

The big bang theory impact

Some of sectors severely impacted by demonetization include real estate and construction. In real estate, both residential sales and new launches have declined sharply during the last couple of months and is expected to remain subdued over next several quarters as even end users defer their purchase in expectation of price declines. The cement sector has also been impacted by the slowdown in two of its major consuming segments being real estate and construction. With a significant proportion of cement consumption being contributed by the real estate sector, the continuing weakness in real estate demand would have a bearing on cement demand.

Despite high financing penetration in the commercial vehicle space, the tight liquidity impacted the road logistics sector, prompting the transport community to put their vehicle replacement or addition plans on the back burner. As a result, the domestic commercial vehicle sales contracted by 8.2% over the last two months.

Our channel checks with various stakeholders in the logistics sector suggest that the liquidity crunch has impacted the near-term demand for trucks. Availability of trucks, especially from market-load operators has reduced significantly owing to limited availability of cash to meet trip expenses. According to commercial vehicle dealers, new enquiries have dried up and some of the ongoing transactions have been put on hold by fleet operators. 

Strong bearing on auto demand

While demonetization has affected the near-term sentiment, we expect the situation to gradually improve as systemic liquidity normalizes and demand to get a boost in the current quarter from pre-buying preceding the implementation of BS-IV emission norms from April 2017. Within the commercial vehicle industry, we believe that the bus segment would however remain largely un-impacted by demonetization move owing to a higher proportion of sales to institutional clients.

The impact of demonetization on consumer demand, especially in the rural market, is most visible in the two-wheeler segment. Domestic wholesale volumes for the two-wheeler industry, declined by 5.9% and 22.0%, during November and December 2016, respectively. The demand declines have been more significant in the commuter segment two-wheelers, while the premium segment has been relatively un-impacted. Our discussion with industry players however indicate, the demand deferment in the segment is likely to be temporary and normalcy should return as liquidity in the system improves.

Demonetization has impacted discretionary consumer spend significantly in the last two months, much of that is however expected to normalize over the next 3-6 months as liquidity situation normalizes. The return to normalcy for the rural market may take longer, due to its traditionally cash dependent nature.

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