Smooth Road Ahead For Vehicle Financing NBFCs

The vehicle financing market in India has been lately taking giant strides of growth. Tanay Loya explores if the sector can be the next growth driver for NBFCs going forward.

The auto finance market is at the cusp of a high-growth period fuelled by economic growth, innovative products, improved credit collection processes and effective use of online channels. Over the years, however, the auto finance market has gone through a number of cycles of low-growth to high-intensity competition, to shrinkage, to stabilisation, and now, it is at the cusp of rapid growth again. These ups and downs in the auto and auto financing markets have helped it mature, making it one of the most developed markets in the Asian region. It currently has about 74 per cent finance penetration, and net non-performing assets (NNPAs) of less than one per cent. This puts it in a key position to leverage the next cycle of consumerism and lending growth in the country.

NBFCs and vehicle financing 

The rise in demand for vehicles has made car financing a core activity for financial players. The aspiration of consumers for car ownership, coupled with lucrative zero down payment schemes and low interest EMIs, have prompted the young population with less capital to go for the luxury of a car. The emergence of NBFCs has expanded the car financing market. Vehicle loan companies get most of their business from semi-urban and rural areas. Most people in urban areas looking to buy cars go to banks for loans, but those seeking trucks, especially from smaller towns, prefer vehicle finance NBFCs since they have a good connect and trust of local customers, especially in tier-II, tier-III and tier-IV cities as there is limited attrition and rotation of relationship managers. Also, the regulatory requirements in relation to documentation and other loan appraisal and sanction requirements for NBFCs are generally less stringent. As a result, the demand for NBFCs is on the rise. Also, the business model of lending against income-generating assets such as commercial vehicle finance, as compared to businesses operating in consumptionbased lending, is always a safer bet.

India's automotive market 

India is a large automotive market and is expected to grow at a CAGR of 13 per cent by value during FY16 to FY26 to reach $300 billion. As the population is expected to hit 1.4 billion in 2020, and majority of this population will belong to the driving age, it provides for one of the world's most attractive auto markets. The growth in the automotive market is expected to be driven by India's strong demographic, socio-economic fundamentals as well as well-developed industry fundamentals, such as credit infrastructure. Also, according to SIAM data for FY18, the CV sector posted a robust double-digit growth of 19.94 per cent with sales of 856,453 units.

Defaults by CV owners remain steady over last 3 quarters; trend to continue in FY19 

According to ICRA Research, loan delinquencies, or failure to make repayments, due to purchase of new commercial vehicles by transporters and fleet operators have remained steady in the last three quarters of FY18. The 90-plus-day delinquencies, including captive financiers in the segment, have remained range-bound at about 5-6 per cent over the last three quarters after improving considerably over the past few years. This can be attributed to the stability in the economy in the last six months and infrastructure development in progress. Hence, trucks are carrying full loads of goods and materials to boost these economic activities. This has placed more money in the hands of transporters on a monthly basis for expanding their businesses further. This stability in delinquencies is expected to continue in FY19 as well. The demand for new vehicles by transport operators is expected to be strong as new contracts won by them will keep the cash registers ringing.

"Regulations related to flexible lending norms such as subvention schemes and lending below base rates are stricter for banks, providing significant expansion opportunities for NBFCs and captives. Captives-driven subvention schemes are highly effective in Indian market." 

 The next growth driver for NBFCs 

According to rating agency CRISIL, NBFCs may see their vehicle finance portfolio grow 300 basis points (bps) faster over the fiscals up to 2020. The vehicle loan business is expected to clock compounded annual growth rate of 15 per cent as compared with 12 per cent seen in the past three fiscals

. CRISIL expects the growth to be driven by an improving macroeconomic environment, coupled with government's increasing focus on infrastructure and rural areas. The market opportunities for NBFCs will likely stem from continued government investments in the roads sector, higher budgetary spends for the rural sector and expected finalisation of the scrappage policy or the voluntary vehicle modernisation programme. About 85 per cent of NBFCs' vehicle finance portfolios comprise of commercial vehicles, cars and utility vehicles financing. The balance includes tractor; 2-wheeler and 3-wheeler financing. While all segments of vehicle finance are expected to grow faster than before, commercial vehicle financing, which constitutes about 51 per cent of the vehicle finance portfolio of NBFCs, is expected to rebound from the lows seen over the last several years and is expected to clock a CAGR of about 14 per cent till 2020.

On account of this, NBFCs would retain their share of over 65 per cent in the overall CV finance market. The light commercial vehicle (LCV) finance will steer the growth as the hub-and-spoke logistics model gains traction after the arrival of GST. Further, the shift to higher tonnage vehicles will also support medium and heavy commercial vehicle financing.

The other major segments, cars and UV financing, which constitutes 34 per cent of overall NBFC vehicle finance portfolio, is expected to clock a CAGR of 18 per cent over the next three fiscals. Banks continue to dominate this segment with a share of 63 per cent, having gained 300 bps market share from NBFCs over the past four fiscals, due to their ability to offer lower yields and attract customers in the top 20 cities. However, within NBFCs, an interesting trend that has emerged in recent years is the significant scale-up in business of foreign-owned captive NBFCs as compared to domestic NBFCs in the cars and UV financing market. The foreign-owned captives have increased their market share by 500 bps in the past four years in the car and UV financing market.

Umesh Revankar 
MD and CEO, Shriram Transport Finance Limited 

"The Demand For PV Will Be Very High"

How has the vehicle financing industry evolved over the years? What are major challenges faced by the industry right now? 

If you look at the overall trade number, the heavy vehicle trade this year has almost reached the same numbers as 2012 numbers. After a gap of five years, the previous high levels are reached. This indicates that it has taken a while to come back to the previous peak. Although there is one change. Last time, the heavy vehicles were more of 25-tonner and 31-tonner, but this time it is more of 37-tonner and 31-tonner. The 37-onner is gaining largely because of the strict implementation of overload ban in certain states. People who were having a lower carrying capacity vehicle were still carrying higher tonners earlier, but now since there is a strict implementation of overload ban, people have to buy a higher tonnercapacity vehicle. Therefore, 37 tonner is preferred. That's how there is a shift in the vehicle. In LCVs also, after a long time, we are witnessing a good demand and this type of demand has come about as the rural India is benefited by two consecutive good monsoons and that has been auguring well.

The agriculture movement is helping. Plus, the e-commerce activities are also quite active. E-commerce activities, which use smaller vehicles to redistribute, and because of that, the segment is also growing very fast. Thirdly, the demand usually comes from one or two pockets, but this time, the demand is everywhere, especially in the rural market. The final one is the resale value of used vehicles is quite strong and reasonably high. All these things are helping the vehicle finance industry at this time. If the monsoon is good, it may continue.

Banks are very active in the new vehicle finance industry, like HDFC Bank, Yes Bank IndusInd Bank. ICICI Bank and Axis Bank are also pitching in here and there. Some capital finance companies such as Mahindra and Tata are also into it. The used vehicle financing is a niche for us. There we do see some competition here and there and some people will be getting into it, but we don't really see it as a challenge because the market is so wide and to tap the demand, one must be deeply and widely penetrated into the rural market and everyone will not have that level of penetration. To the extent we are considered, we are well-penetrated.

With increasing bond yields, how do you see your borrowing structure going forward? 

We feel that the overall increase in the bond yields is around 50-60 basis points and a third of our borrowing is coming for the pricing. So, we may not have a really big increase and may be there will be 15-20 basis points overall increase, which we can pass it on to the customers, because our customers are predominantly used vehicle owners and in the rural market. So passing it on to them is not really a big challenge. 

In your view, how was FY18 for the vehicle financing Industry? What were the growth drivers for your company in FY18? 

Mostly the rural economy, since we are in the used vehicle financing and the demand for used vehicles mostly comes from rural and semi-urban areas. The growth is quite robust there and the demand is good. If the monsoon is good this year, we should have another two or three consecutive good years. In 2020, since Euro-VI technology is coming, the demand for used vehicles should remain quite strong.

Which segment among vehicle financing is expected to grow fastest? 

The commercial vehicle demand is good, but if you look at it on a cumulative basis, the demand for passenger vehicles is likely to be much faster, commercial passenger vehicles, not privately owned. As there is better economic activity and prosperity, people would like to move from one place to another for work and business. So the demand for passenger vehicle and transportation is likely to go up significantly. I see the government is slowly reducing its spending on public transportation, which means private transportation is going to be the future. 

The government is spending less on public transportation and its focus is largely on the mass transportation through railway. In that case, the demand for passenger vehicles will be very high, and if you are well-entrenched in that, there should be good growth.

What is your outlook on vehicle financing industry in FY19? 

We are looking at an AUM growth of 18-20 per cent based on the good monsoon forecast. If the forecast comes true, we should be able to grow well. My explanation is that if the markets in the North and East continue to grow, we should be able to grow at 18-20 per cent on AUM basis. For general financing industry, it should grow at 15 per cent. We should be able to grow faster than the industry because we have a better reach. Last year, we added 295 branches and this year also, we will be adding over 200 branches. Thus, looking at our reach, we should be able to do better than other companies.

The car financing markets is expanding rapidly due to improved credit collection, effective online portals and recovery of the auto sector. Both private and captive auto financiers are focusing on building a more holistic relationship with both car buyers and dealers. There is a significant scope of innovation in improving customer experience, customer lifecycle management and digital operations. The NBFCs have carved a niche in the small fleet operator and first-time buyer segments of CV finance by leveraging on their core strengths of customer relationships, adaptability, local knowledge, and innovativeness. Given the number of unbanked population in the country, the need for providing low-cost credit is imperative and within the space, CV financing holds special traction. Keep eyes on the vehicle financing portfolio of NBFCs going forward.

M&M Financial Services 

CMP : Rs.504
BSE CODE : 532720
Face Value : Rs.2
BSE Volume : 53167

Mahindra & Mahindra Financial Services is a nonbanking finance company (NBFC) and provides financial services in rural and semi-urban areas across India. The company offers a range of retail products and services, including financing vehicles for commercial and personal use, tractors, small and medium enterprise loans and several other financial products. Through its housing finance subsidiary, Mahindra Rural Housing Finance, the company facilitates low and middle income households to build their own house. It also provides mutual fund distribution, fixed deposit schemes and personal loans. The company's subsidiary, Mahindra Insurance Brokers Limited, is involved in life and non-life insurance products through tie-ups with various insurance companies. 

 On the financial front, the company posted 12.85 per cent increase in its net sales to Rs.2,059.99 crore in the fourth quarter of FY18 as against Rs.1,825.45 crore in the same quarter of the previous fiscal. The PBIDT of the company increased by 32.40 per cent to Rs.1,421.77 crore in the fourth quarter of FY18 as compared to Rs.1,073.86 crore in the fourth quarter of FY17. The net profit of the company increased by 81.37 per cent to Rs.424.52 crore in the fourth quarter of FY18 as against Rs.234.07 crore in the fourth quarter of the previous fiscal.

On the annual front, the company posted a 15.76 per cent rise in its net sales to Rs.7,147 crore in FY18 as against Rs.6,173.91 crore in the previous fiscal. The PBIDT of the company increased by 24.09 per cent to Rs.4,293.35 crore in FY18 as compared to Rs.3,459.89 crore in FY17, respectively. The net profit of the company grew significantly by over 122 per cent to Rs.891.88 crore in FY18 as against Rs.400.24 crore in FY17.

On the valuation front, the company maintained a PE ratio of 35.35x as against the industry PE of 31.74x. Meanwhile, the company's peers Bajaj Finance and Shriram Transport Finance Company recorded a PE of 46.09x and 22.77x, respectively.

The company's gross NPAs witnessed an improvement to Rs.47 billion in the fourth quarter of FY18 as against Rs.62.2 billion in the second quarter of FY18 and Rs.60.2 billion in the third quarter of FY18. The company also recorded an AUM traction in the fourth quarter of FY18, rising to Rs.551 billion as against Rs.467.8 billion in the same quarter of the previous year.

The company also recorded a good growth in its core business in the previous quarters, over 12 per cent rise in its net interest income and significant improvement in asset quality. With the anticipation of a strong growth in rural cash flows in the current fiscal and improving quality of assets, the company is expected to record a notable growth in AUM in FY19.