Vehicle financiers may lose some sheen due to changes in macro factors

While the rising cost of funds might impact margins, high fuel prices and low freight rates could bring some pressure on vehicle demand

With a strong performance and the supporting macro environment, stocks of three major auto/vehicle finance companies - Mahindra & Mahindra Financial Services, Cholamandalam Investment and Finance Company and Shriram Transport Finance Company - have surged 30-50 per cent in the past year. However, unfavourable changes in some macro factors have led to some pressure on these stocks, which fell 6-8 per cent in the past month.

Firstly, the increasing cost of funds could weigh on their profitability, as many banks have started increasing their lending rates, and interest rates on debentures are also trending upward due to the high-yield trajectory. The auto-finance companies source a large chunk of their fund requirement (77-82 per cent) through loans and debentures. Even going ahead, the upside interest rate risk is likely to persist owing to high inflation, more than anticipated GDP growth, etc.

Given stiff competition and relatively high-interest rates charged by finance companies, experts are sceptical of auto-financiers’ ability to pass on the high cost of funds to customers. Having said that, “This set of financiers (auto/vehicle finance companies) can manage their cost-to-income ratio to protect their margin," says Rajesh Gupta, assistant vice president, retail research at SBICAP Securities. The street would be keeping an eye on the June quarter numbers to see if the margins remain intact.

Secondly, though April-May 2018 sales grew strong mainly owing to lower base due to goods and services tax (GST) impact last year, auto-vehicle demand could see some pressure going ahead given the high fuel prices and low freight rates. High crude oil prices and a weak rupee versus the US dollar are pushing up fuel prices, which are at record levels. Diesel prices, for instance, were hiked by over 15 per cent in the past six months. And, prices are likely to remain elevated in the near term, say experts.

On the other hand, freight rates are also under pressure. And this would weigh on businesses of commercial fleet players.

Amidst these developments, analysts say whether the asset quality of the vehicle financiers comes under pressure, owing to a delay in repayment of loans by vehicle owners as their income may get impacted due to low freight and high fuel prices, will be interesting to watch in the ensuing quarters.