SHTF, India’s largest player in commercial vehicle finance, was established in 1979. It is one of the largest asset-financing NBFCs in India with a niche presence in financing pre-owned trucks and small truck owners. As on March 2014, it had on-book assets of Rs 345bn and off-book assets of Rs 182bn. It is a leader in organized financing of pre-owned trucks with strategic presence in 5-12 year old trucks and a market share of around 25%. It has a pan-India presence with a network of 654 branches,and employs 18,122 people including 11,209 field officers. The company has a customer base of approximately 1.1mn. Over the past 35 years, it has operated in the areas of loan origination, valuation of pre-owned trucks, and collection. It has a vertically integrated business model and offers a number of products including pre-owned CV financing, new CV financing, tractor and passenger vehicle financing; and other loans like accident repair loans, tyre loans, and working capital finance.
Q. IIP has been showing no signs of improvement, which is also impacting CV sales. When do you expect the commercial vehicle cycle to turn around and what factors will drive the improvement?
IIP improvement will be driven by an uptick in consumption demand, which has been slowing down in the last two years. For an uptick in consumption demand, inflation will have to be brought under control and net savings will have to improve.Also, manufacturing activity will have to pick up, which will create jobs and consequently demand. As of today, the constraints for manufacturing activity are poor infrastructure, several bottlenecks, and higher interest rates.
Freight growth can be pegged at 1.2x of the GDP growth. Moreover, railway freight growth has been constant at around 4% for past few years. Improvement in GDP will positively impact freight growth and hence new commercial vehicles. The CV cycle will revive only in H2FY15 mainly in October-November 2014, which will be partly driven by pick up in mining activity in Karnataka and Goa, and also as stalled projects become operational.
Q. New CV cycle has seen an elongated slowdown. Is there any trend that is normally seen for used CVs?
Used CVs do not have a pattern like new CVs because for used CVs the capacity already exists. Used CV transactions depend on the application of the vehicles. For long-distance freights, dependence on new CVs is high whereas used CVs are mainly employed for short distances and for carrying essential goods and raw materials (like mud, sand, etc.).
The high capacity utilization of new commercial vehicles in FY03-07 and FY10-12 resulted into a temporary demand-supply mismatch, which translated into an increase in demand and price for pre-owned vehicle. However, unlike previous cycles, the capacity utilization of new CV manufacturers are low and any increase in demand for new CVs can be absorbed well by the current capacity. Therefore, pre-owed vehicle market may not see a huge latent demand or increase in prices. Nonetheless, increasing demand for new CVs will always lead to more used-CV transactions.
Q. What is your take on the impact of the mining ban in Odisha? Can we expect the Bellary situation for SHTF to repeat?
We at SHTF have been reducing our exposure to the mining segment from the time the Bellary mining ban was imposed and we had saw some asset quality stress. Therefore, we do not see us getting impacted in any major way by this Odisha mining ban.
Q. Despite declining CV sales and limited economic activity,how has SHTF managed to grow?
In the last two years, we entered the 2-5 year old CV segment,which gave us good growth. Earlier we were doing mainly the 5-12 year segment. The reason we entered this 2-5 year segment was that many fleet operators wanted to reduce their fleet size, which resulted in a good supply of these vehicles. The buyers also preferred the lesser driven older vehicles because of better pricing and also as they were cautious about buying a new vehicle.
Q. If there is an improvement in the overall economic environment, can we expect SHTF to be very aggressive in the new CV lending segment?
We will go by what customers want. If they want to buy a new vehicle, we will support them by financing it. But, for the purchase of a new CV, we will only finance existing customers.We will not focus on acquiring new customers in the new CV segment. The focus will always remain on used CV segment.
Q. Has there been improvement in collection efficiencies in the last few months? If yes, what factors have led to improvement in collection efficiencies? Is there any improvement in cash flows of operators?
The collections efficiencies did improve in the last few months of FY14, but that was more of a year-end phenomenon,which we see every year. Another reason why there was an improvement was that freight rates were better in Jan-Feb 2014 and operators’ cash flows were also better. Nonetheless,we expect collection efficiencies to come off a bit (due to seasonal moderation in freight rate) and pick up again after June 2014.
Q. What is the current utilization rate of fleet operators? How much is it in the peak season?
Currently, the utilization levels are at around 21 days. The utilization has come off due to slow movement of goods in various segments like FMCG, cement, agriculture etc. However,in a busy season, utilization levels can go up to 25 days.
Q. How do you see the business environment now in Andhra Pradesh?
We have a big presence in Andhra Pradesh. About 15-20% of our disbursements used to come from there, but with political uncertainty in the last one year, it came down to 10% of our disbursements. However, we now see things improving there and expect some pickup in growth and also some improvement in recoveries.
Q. Shriram Transport’s NIMs have steadily remained below 7% in the last few quarters. Where do you see NIMs going from current levels? What will drive NIM improvement,if any?
NIMs are currently under pressure because cost of funds has remained high and also since customers are not able to absorb increased pricing. Our aim is to improve NIMs to 7%. However, we expect the increase to be more gradual and do not see NIMs touching 7% immediately.
Q. Where do you see Shriram Transport in the next 5-10 years? Will it continue to be a predominant CV financier or will there be any change in the business model? Is there a possibility of a merger between Shriram Transport and Shriram City Union Finance?
Shriram Transport and Shriram City will continue to remain separate business entities. There will not be a merger between the two entities. SHTF will always continue to focus on earning assets. Our market share in tractors, UVs, and cars is very low. We see good potential in tractor financing where we have a market share of only 4-5% (SHTF has financed 200,000 vehicles out of a tractor population of 5million). So we may see some growth there. But we will mainly do pre-owned income-generating asset only. That has been our DNA and will remain that way.
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