Home / Market / Mark-to-market /  How soon will lending to commercial vehicles perk up?

The earnings of commercial vehicle (CV) lenders have been hurt in the past couple of years because of a prolonged slowdown and regulatory hurdles such as the mining ban and cancellation of coal blocks. Will the recent lifting of mining restrictions and replacement demand for vehicles boost demand for commercial vehicle loans?

Religare Institutional Research in a note dated 25 March said that earnings of four CV lenders under its coverage is estimated to improve between 18% and 34% during FY16-17 as disbursements grow over 20%. While this column has reported that there are some green shoots as sales of medium and heavy commercial vehicles segment rose 35% in February, it might take some time before we see a full recovery. Umesh Revankar, managing director from Shriram Transport Finance Co. Ltd said, “We are currently seeing loan demand for heavy commercial vehicles on back of replacement demand and as customers switch from 25 tonne to high 31 tonnage segment which is fairly new and used vehicles are not easily available. The replacement demand should sustain for some time."

However, it will take time for the demand to percolate into light and medium CV segment as unseasonal rain is going to be a dampener for the rural economy. Around 5-10% of the crop is damaged because of unseasonal rain at a time when rural growth is very fragile. Also, while the ban on mining in Goa and Karnataka has been lifted, there is still a 30% tax on exports and allocation of mines needs to happen, which means we’ll have to wait six months to one year before we see demand trickling in from the mining and infrastructure sector, added Revankar. Small road transport operators are absent and will come back only when they see actual recovery on the ground. While banks have not cut rates, cost of funds is expected to come down as a fifth of the borrowing for CV lenders is from the money market, where rates have fallen.

Aggregate net profit of five CV lenders—M&M Financial Services Ltd, Shriram Transport Finance Co., Cholamandalam Investment and Finance Co. Ltd, Shriram City Union Finance Ltd and Sundaram Finance Ltd—have declined over 9% so far this fiscal year compared with a year ago after clocking 2.2% growth in FY2013-14, according to Mint analysis. While shares of CV lenders have outperformed the broader markets (except M&M Financial Services) and are trading between 3-6 times price to book, improvement in investment and manufacturing activity is a must for the outperformance to sustain.

The writer doesn’t own shares in the above-mentioned companies.

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