Bad news for financiers: CVs in for a long haul, may be last to recover

Lower fleet utilisation, weak cash flows keep NBFCs under pressure

Commercial vehicles (CVs) have spoilt the party for both automakers and vehicle financiers, at a time when overall auto sales were picking up pace and had seen some recovery in June over May.

Analysts forecast CVs to trail in the long race for revival of the sector, which will not be music to lenders’ ears.

Covid-19 was a double-whammy for the CV segment, which was already under pressure due to the auto slowdown. Lower fleet utilisation, hike in vehicle prices amid the BS-VI transition, and the muted demand were factors that hurt the CV segment. Shashank Kanodia, auto sector analyst at ICICI Securities, said: “Unlike other automobile segments, CVs have a direct linkage to economic activities like transportation, etc, which faced disruption amid Covid-19, resulting in lower fleet utilisation.”

Unless CV utilisation reaches optimum levels, and domestic economic activity rebounds to pre-Covid levels, demand for CVs may remain subdued, he added. Rising fuel and labour costs have only added to woes of fleet/truck operators.

All these factors, put together, will likely impact loan growth and asset quality of financiers, mainly non-banking financial companies (NBFCs), which — according to BOB Capital Market — have over 60 per cent share in the CV financing market. Umesh Revankar, MD and CEO of Shriram Transport Finance — a dominant player in the used (pre-owned) CV market — however, foresees fresh CV demand from September.

 

 

“With transportation of FMCG products and demand for essential commodities having risen substantially, utilisation in the CV segment is rising. Challenges will remain mostly for those engaged in infrastructure or mining activities, which are mainly dependent on government initiatives,” he said.

Analysts, though, have sounded caution and believe lenders will face pressure throughout the year. “Consolidation, cash flow delays, structural drop in demand once the current surge from pent-up demand settles down, and low utilisation among certain fleet owners, will all keep demand and asset quality for lenders under pressure through FY21,” said IIFL analysts in a report last month.

Shweta Daptardar, analyst at Prabhudas Lilladher, concurs. “Low utilisation is hurting new CV purchases, and given the negative GDP (gross domestic product) outlook, we don’t see any bounce-back in the segment.”

In fact, the used-CV segment — which was expected to recover in H1FY20 — will see further delay in recovery, she cautioned.

NBFCs like Shriram Transport Finance Company, Shriram City Union Finance, and Sundaram Finance have over 50 per cent exposure to the CV segment, while Mahindra & Mahindra Financial Services, and Cholamandalam Investment and Finance Company have 19-25 per cent exposure.

Though lower interest rates and the encouraging rural outlook offer some comfort, worries outweigh the positives, which could take a toll on NBFCs.

During the final days of Q4FY20 (first 10-12 days of the lockdown), all these financiers reported 9-36 per cent YoY fall in loan disbursement. Profit before tax and exceptional items fell 26-88 per cent YoY, driven by higher provisions.

This highlights the potential impact these lenders could face in the coming quarters. While most of them have reported an increase in their loan book, it has been partly on account of lower repayments with many borrowers opting for the moratorium.

Majority of these NBFCs have seen over 75 per cent of borrowers opting for the moratorium. This is also a reason behind the improvement in asset quality seen in Q4.

Analysts believe it is difficult to gauge the moratorium’s impact on asset quality. Hence, the September quarter — when the moratorium period concludes — will provide a better indication of asset quality.

In case of CV borrowers, their repayment ability is subject to overall utilisation and usage. According to IIFL: “CV operators will find it difficult to service their EMIs (equated monthly instalments), once the moratorium is lifted. Either loans will need to be restructured or number of defaults will rise.”

Barring Shriram City Union Finance, all other stocks have risen over 24 per cent since their March lows. Investors are advised to await signs of demand recovery.