Indian Railways is giving a tough fight to truckers. Who will win the battle?
A sharp revival in CV sales is often followed by a swift turnaround in the manufacturing sales. However, this has not been the case this time.
Commercial vehicle (CV) sales in India have been growing strongly over the past one and a half years even as car sales grew by a mere 1.9% last year and factory output has lagged clocking 0.1% growth in the month of March.
A sharp revival in CV sales is often followed by a swift turnaround in the manufacturing sales. However, this has not been the case this time.
What is going on?
According to Kapil Gupta and Prateek Parekh of Edelweiss Research, in a report dated May 9, 2016, “Our sense is that road transport has been gaining market share from railways, especially since late 2014, due to widening gap between the truck rentals and railway freight rates.”
They say that truckers have cut down rentals amid falling fuel costs, while railways has actually increased freight rates in past 6 quarters.
Is this why truck sales are soaring?
“Our sense is that it could partly be a market share gain story for the truckers vis-à-vis the railways. After all, over past 6 quarters, railway freight tonnage growth has been in contraction zone (YoY), whereas M&HCV sales have risen by over 30% on average during the period,” Gupta and Parekh said.
Truckers were quick to cash on the opportunity and lowered their rentals as diesel costs fell but Indian Railways actually took a freight rate hike in 2015. “This perhaps rendered the railways relatively uncompetitive vis-à-vis road transport, thus paving the way for disproportionate gains in M&HCV sales,” they said.
Will this continue?
Unlikely. Diesel costs have gone up by 10% and truck rentals have increased nearly 8% over the past three months. “Railways, on the other hand, have initiated steps in past 2 months to rationalise freight rates (such as withdrawing peak season surcharge and rationalising freight rates for shorter distance) to win back business from road transport,” the two said.
Suresh Prabhu, Railways Minister of India, made is amply clear during his Budget speech in February that he is unlikely to let truckers win the logistics business. He was quoted in an India Today report as saying, “We are losing freight to road sector. We are trying to get it back through rationalisation of freight rates.”
The seriousness of his intent is visible from the fact that already, in past 2 months, the railways has withdrawn the busy season surcharge (of 15%) starting May 1, 2016.
“Thus, the story of trucks wresting market share from railways may have run its course from near-term perspective and if so, CV sales may moderate in ensuing months, unless we see fresh leg down in diesel prices,” they further said.
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