The average distance covered by an Indian goods carrier has risen from 225 km a day to 300-325 km after the imposition of goods and services tax (GST) dismantled multiple sales tax and inter-state check gates on highways and state borders.
This has cut average travel time by 20-25 per cent and improved profitability of truck operators by 1.5 times.
Analysts say this can have a bearing on the auto and auto ancillary sectors. Some say better efficiency will curtail demand for new trucks, while others say improved profitability would prompt truck operators to go for fleet upgradation with newer fuel-efficient, high-speed and low-maintenance trucks.
The tyre industry is hoping to see replacement demand come back. Some projections show an increase in travel distance of a truck by 100 km a day can lift tyre demand significantly.
Replacement demand is likely to play a pivotal role in tyre sector’s demand cycle during FY17-19E, brokerage EdelweissBSE 0.61 % Securities said in a report.
The brokerage said savings on the use of new trucks would compensate for higher EMIs on new trucks and also reduce freight rates.
This shift will benefit companies like Ashok LeylandBSE 2.92 % because of their strong positioning in this segment, the brokerage said.
“Ashok LeylandBSE 2.92 % will continue to be a top pick in this space given its strong positioning in higher tonnage trucks. The company’s focus on widening product offerings and expanding reach is likely to propel its current 15-year-high market share and industry leading RoE,” said the report.
After the implementation of GST on July 1, 2017 shares of Ashok Leyland have risen 9.27 per cent to Rs 105 on August 28, 2017 from Rs 93.85 on June 30, 2017.
Since GST implementation on July 1, most tyre stocks have failed to deliver positive returns to investors, with JK TyreBSE -0.21 % and TVS SrichakraBSE 0.97 % falling 15 per cent and 13.16 per cent, respectively, till August 24.
Among others, CEATBSE -0.01 % is down 11 per cent, MRF 11 per cent and Govind RubberBSE 2.30 % 10 per cent, whereas benchmark BSE Sensex has advanced 1.20 per cent in the same period.
Modi RubberBSE -1.75 % gained 33 per cent between July 1 and August 24.
Auto companies have been facing headwinds from multiple events since the start of 2017. The industry took a hit due to transition from BS-III to BS-IV in April.
Sales dipped in June in the runup to GST implementation, while July saw return of stability in sales as dealers began re-stocking inventories.
On an average, tyre firms reported nearly 75 per cent year-on-year fall in net profit for June quarter. JK Tyre posted a net loss of Rs 107.73 crore compared with a net profit of Rs 100.26 crore in the year-ago quarter. CEAT and MRF reported 99 per cent and 78 per cent year-on-year drop in June quarter profit, respectively.