Why Commercial Vehicle Financiers Are Outperforming On The Stock Markets
Trucks parked at Mahindra & Mahindra’s facility in Chakan, Maharashtra. Demand for commercial vehicles was the weakest in the April-June period, says Bharat Forge. (Photographer: Udit Kulshrestha/Bloomberg)

Why Commercial Vehicle Financiers Are Outperforming On The Stock Markets

Commercial vehicle financiers are set to end fiscal 2021 on a strong note with loan disbursements rising, even though the second wave of Covid-19 infections could add uncertainty to the business once again.

Commercial vehicle sales have been gradually recovering for 10 straight months, rising 17.2% month-on-month to 16,360 vehicle registrations in March, according to data from the Ministry of Road Transport and Highways. The growth has been led by the sales of mini-trucks, pick-up vans and other light commercial vehicles that saw higher sales as online deliveries picked up during the pandemic.

The biggest beneficiaries of rising sales of new and used commercial vehicles, according to Jignesh Shial, research analyst at Emkay Global Financial Services, will be vehicle financing non-bank lenders who have a strong share of this segment.

“Large players, such as Shriram Transport Finance Company Ltd, Cholamandalam Investment and Finance Company Ltd, and Sundaram Finance Ltd have seen healthy growth in their new business over the last quarter, and considering the cost of funds is relatively lower for better-rated companies, their margins are also likely to improve,” he said.

As used and commercial vehicle sales improved, the demand for credit has risen bringing the total loan disbursements in the segment to 80% of pre-Covid levels, according to a March 25 report by broking firm Prabhudas Lilladher. “Our channel checks indicate that commercial vehicle finance business is expected to accelerate on the back of healthy demand conditions, anticipated improvement in supply chain and resilient balance sheets of financiers,” it said.

The commercial vehicle financing business, according to the report, has seen improvement due to higher freight rates, improving cash flows of operators, good rural demand, and used CV demand.

As demand for vehicle financing improves, the fourth quarter of fiscal 2021 could be “the best-ever quarter for vehicle finance companies over the last one year”, said Siji Philip, senior research analyst at Axis Securities.

"Considering disbursements have picked up on gradual recovery in demand, especially in the used cars, and light to intermediate commercial vehicle segments and collection efficiencies have also improved for most vehicle-focused NBFCs, it could be a turnaround quarter,” she said.

In addition, collection efficiencies improved for the top NBFCs in the segment, including Shriram Transport Finance that saw its collections rise to 95-104% through October-December last year, Cholamandalam Investment and Finance increased to 98%, Sundaram Finance improved to 96%, while Mahindra & Mahindra Financial Services Ltd. saw collections grow between 82% and 96% during the period.

For Shriram Transport Finance, disbursements are likely to grow 23% year-on-year between January and March, while for Cholamandalam Finance the growth may be close to 40% on the back of growing demand for used vehicles/CVs, according to an April 7 Emkay Research note.

The anticipated improvement in the earnings performance of large vehicle financiers has also been reflecting in their stock performance.

While Cholamandalam Finance's stock price more than doubled to Rs 510.85 between October and April 12, 2021, Shriram Transport Finance rose 97%, and Sundaram Finance rose 87%. Comparatively, Mahindra Finance showed lesser appreciation close to 30%. However, all the four companies outperformed growth in the Nifty Bank and Nifty Financial Services indices, during the period.

“We remain bullish on large vehicle financiers that are set to outperform their NBFC peers due to growing loan disbursements and the consolidation happening in the sector,” said Shial.

While Cholamandalam Finance is expected to "revive sharply", and Shriram Transport Finance with a "continued momentum", Mahindra Finance may see some pain on dipping tractor volumes due to the seasonality, said the Emkay research note.

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