Interview: Senthil Kumar, Head of Commercial Vehicle, Manappuram Finance

In an exclusive interview with Trucksdekho, the CV head at Manappuram finance elaborate the factors impacting the domestic CV industry, the importance of financing for trucks, how the company is growing in the commercial vehicle finance business, and the potential in the CV segment.

The automotive industry and the commercial vehicles sector is going through one of its toughest time. Could you give us an overview of the CV market?

 The Indian auto industry is going through a difficult phase of falling sales and inventory build-up. The industry clocked double-digit growth of 14.2 %in 2017-18, bouncing back from the effects of demonetisation and GST. Although the initial months of 2018-19 witnessed good growth, it slowed down to single digits towards the middle of the year and rapidly lapsed into a drop in volumes as the year drew to a close, leading to production cuts.

The finance minister announced a stimulus package for the industry assuaging the negative sentiments though it might not change things on the ground immediately. Rising fuel costs, erratic monsoon, and lower farm prices dented rural sales. Commercial vehicle sales began feeling the heat due to two reasons: one, quicker turnaround times after GST, and two, the permission to carry higher loads for existing vehicles. In July/August 2018, the government increased the axle load limit for all trucks, increasing the operational freight capacity by 20-25 %, roughly equivalent to three years of incremental freight demand. The downtrend began from the festival season of last year.

Dealers who usually load up on inventory to meet the festive season demand saw limited offtakes and were left with piles of unsold stock, as dispatches from manufacturers continued in the hope of a revival. Estimates by the Federation of Automobile Dealers Associations (FADA) in February 2019, show inventory levels touched a peak 50-60 days for passenger vehicles, 80-90 days for two-wheelers and 45-50 days for commercial vehicles.

A far cry from the ideal level of three weeks or 21 days inventory advocated by the body. This necessitated production cuts from manufacturers and led to retrenchment. As of July 2019, average inventory for passenger vehicles came down to 25-30 days, thanks to production cuts and lower dispatches to dealers. The average inventory for two-wheelers ranged from 60-65 days and for CVs, from 55-60 days. Barring cars, the inventory levels for two-wheelers and commercial vehicles continue to be high even today.

Finance is highly critical in purchasing a commercial vehicle as it is an expensive asset that a customer acquires for his livelihood. What are the key trends in the Indian CV finance business that you would like to share?

Financing is exceptionally crucial for any asset whose utilisation is directly correlated with how the economy performs. The commercial vehicle sector is a pivotal contributor to economic growth and development. When there’s a rising demand for investment, need for infrastructure and demand for enhanced production capabilities, then there’s a voluntary market demand for commercial vehicles and hence credit. In situations of slowdown, the imperative to improve effective credit extension, i.e. the supply side, doesn’t always work out. The experience with pushing for credit extension to revive markets is that it contributes more to bad loans. Slowing growth and the liquidity crisis are primary reasons for the current downturn compared to earlier cycles which were triggered by global events like the Asian crisis, the Dotcom bubble, the global financial crisis, etc. The recent crisis had a twin effect, firstly it curtailed financing, and secondly, there has been an increase in loan defaults by fleet operators. With the economic downturn, the overall demand for freight has fallen, impacting the financial health of transporters and truck drivers.

Fleet owners usually have contracts with vehicle manufacturers on purchasing new trucks. With new truck orders falling to a trickle, the situation has become a double whammy for commercial vehicle manufacturers, already reeling under the impact of the new axle load norms, which have also affected demand. Financing options have dried up for fleet owners amid the liquidity crisis.

The most robust stimulus measure is to increase liquidity in the NBFC sector. The sector accounts for the financing of around 55 % of commercial vehicles, both new and used, 30 % of passenger cars and nearly 65 % of the two-wheelers in the country, which means that the liquidity crisis has a significant impact on the demand for new vehicles from both businesses and consumers.

Furthermore, an attempt to increase the involvement of the banking sector in home and vehicle financing will be beneficial for consumers' access to funding and, therefore, vehicle sales. However, there is a high level of risk that banks may not increase their exposure due to asset quality and profitability concerns.

Can you offer an overview of the Manappuram Finance and the current business plan and strategy for the CV finance segment?

Manappuram Finance Ltd. (MAFIL) is one of India’s leading NBFC’s dominant in gold loans. Since our founding in 1992, we have experienced immense growth with many milestones achieved. In the world of financing, with such fierce competition, continuously innovating, evolving and supporting rapid growth are the essential ingredients in establishing a significant hold in the credit market.

Over the last four years, the company has diversified into new business areas like microfinance, vehicle and housing finance, and SME lending. Vehicle financing division is one of the critical business areas for MAFIL, which has significantly contributed to the overall growth of the company since its initiation.

We aim to make commercial vehicle financing more inclusive as well as exclusive at the same time. We want to expand on our existing products and services to the optimum level, create a sense of exclusivity for every product we offer to our wide range of customers. Our primary objective is to make customers realize we have something different to provide to them at every stage.

To give an overview, out of the total Rs. 1400 odd crores of our portfolio, approximately 85% of it has been extended as financing for the Used Truck segment. This segment has been our niche, and we have always been clear on our objectives on how leveraging on the evolving customer dynamics and emerging business models, we intend to empower the existing and potential drivers in this segment to grow and prosper. Our USP has been our indigenous collection mechanism, the human touch element and the ability to connect with our customers. The majority of our customers belonging to this segment are either first-time buyers or small and medium-sized fleet owners. Building their capacities through efficient and effective financing, along with giving them the essence of being exclusive at the same time, significantly develops their confidence in pursuing their business ventures more effectively.  Our primary goal would be to innovate, differentiate and implement our dynamic imperatives and hopefully, we can further drive the change in the used truck segment considering the ever-expanding demand for logistics and the need to shift to a more organised platform.

The performance of Manappuram Finance been performing over the last 1-2 years, and what is the near-term forecast for the company?

Manappuram Finance has performed exceptionally well over the last couple of years. Especially in this fiscal year, amidst the liquidity and NBFC crisis, MAFIL has shown consistency and the performance from the previous few quarters represents continued progress along with the stated objective of growth with profitability. The sharp increase in business volumes and profitability can be attributed to strong all-round performance across all verticals. The organisation is now well placed to keep up the momentum and ensure the achievement of future goals.

5)  Overall, how Important is the commercial vehicle finance sector for the company?

Commercial Vehicle finance sector is the third-largest vertical of the company. Although the percentage share to total AUM is still small, the vertical has significantly contributed to business volumes and profitability. The vertical has exhibited a strong performance since its inception in 2015, with a CAGR of 71.2%. We already have a wide range of products on which we want to expand, have deeper market penetration, both urban and rural. Knowing the potential of commercial vehicle financing market in our country and the rate at which it is growing, ensuring ongoing expansion and penetration is our key priority.

Apart from the various macroeconomic indicators indicating India’s rapid growth process in the long run, the improvement in the ease of doing business and intense demand for logistics and supply chain mechanisms will only lead to an ever-increasing demand for credit in this business. Once the current economic slowdown, mostly cyclical contributors, is treated with practical policy imperatives, the long-run outlook for this industry is positive. It’s just a simple concept of demand and supply economics. We already have the demand for such credit, and we only have to push ourselves and create a robust supply of such credit more effectively and efficiently. Therefore, I am confident this vertical will keep playing a crucial role in the growth story of the company.

How has the company been facing the slowdown over the one year, and what are the key learnings?

Fortunately, MAFIL has not faced the brunt of the slowdown. Also, the significant chunk of our portfolio caters to the used vehicles segment. The positive, amidst the auto sector slowdown, has been a substantial rise in the used commercial vehicle sales. At a time when new commercial vehicle (CV) sales are coming down, those of used vehicles are seeing momentum. This is mainly owing to a pick-up in light CV (LCV) and Intermediate CV (ICV) demand. Most players in this space have reported positive growth, and a key reason is an increase in realisation. According to industry estimates, while the organised sector is selling 10,830 units a month, the unorganised one is selling five times this.

Shriram Automall, which claims 60-70 % market share in the organised second-hand CV market, says its price realisation has gone up by 15-20%. The signs are positive, and one needs to carefully understand the cash flows and cycles of these businesses and monitor them appropriately. The segment continues to be high on potential and has ample credit absorption capacity.

The disruptions caused by demonetization and GST have eased over time through the regular cycle is yet to become normal, given the backdrop of the steep increase in fuel prices and the severe economic slowdown. Overall, our NPAs are at less than 3 % in the vehicle finance book, which is relatively low, and we are not observing any pressures. Although we did find a slight rise in early delinquency levels, mostly coming from the impact of the slowdown on vehicle deployment, lack of freight demand and stalling of infrastructure projects, that has been taken care of. Our constant endeavour is to bring down the delinquency levels by filtering the right customers through our efficient credit mechanisms which makes use of our in-house data analytics platforms.

What are the key opportunities and challenges in the CV finance in India today?

The primary challenges would be to address the key factors contributing to and aggravating the slowdown scenario in the sector. Slowing income growth and the NBFC crisis are the primary reasons for the current slowdown. Hence, the revival of lending by NBFC is critical for demand revival. This would take care of the domestic driven challenges. Factors like sharp regulatory cost pressure and significant margin pressure also need to be addressed effectively. Stimulus package for the automobile sector is "too little, too late" to prevent a contraction in vehicle sales, and a cut in GST rates together with a properly defined vehicle scrappage scheme will be needed to arrest the decline.

The assurance that vehicles purchased now will not become illegal when stricter pollution standards are introduced in 2020 might have the most impact on consumer and business demand for vehicles, but it does not directly increase the ability of consumers to purchase new vehicles. The strongest stimulus measure by the government is its move to increase liquidity in the shadow banking sector (or non-banking financial companies), which is the largest contributor to the current contraction in India's vehicle sales.

Besides, the most attractive opportunity for us especially would be to leverage the positive outlook for the used commercial vehicles segment. Over the past five years, the size of the pre-owned market has expanded significantly, with a higher share of organised players. For instance, in the passenger vehicle (PV), significantly higher growth in pre-owned cars over the past two years is a reflection of rising consumer interest in this segment. This is an immense opportunity for us to further enhance our niche in this segment and effectively capitalize on the evolving customer dynamics through innovative business models.

What are the ways the company adopt to reach to its customers? How do you reduce customer acquisition cost? 

Our customer acquisition costs are minimal due to an extensive presence across all locations in India through our branches. The CV is exclusively present across 22 states, covering over 250 Locations. Apart from vast cross-sell opportunities we leverage upon through our gold loan customer base, our alternative sourcing channels have also contributed significantly to our business volumes. Currently, we have also been laying emphasis on creating a digital journey for our customers, right from onboarding to underwriting to disbursement. This will also add another dimension to customer acquisition that is rarely seen in the CV industry.

What are the digital strategies you are embracing to tap into the increasingly growing digital users?

Knowing the high level of competition already existing in this field, we take lessons from our history of unparalleled growth, to generate more flexible and market capturing solutions and implement effective product and technology innovations. We continuously explore various innovative approaches to raising finance; create efficient solutions for customer onboarding and management through our services, while maintaining growth and quality of our portfolio through several active initiatives. For example, we are one of the first Commercial Vehicle financiers to use robust data analytics platforms on our internal as well as bureau database for evaluating customers through various behavioral and static scorecards.

This is not a common CV industry practice, but through a lot of perseverance and hard work, we have been able to use data-driven decision making as an aid to our credit underwriting process as well. The utilisation levels span across portfolio quality monitoring, proactive approach, managing TAT, and further improving business efficiency. We are also tying up with online aggregators to expand on our digital footprint, especially for the used vehicles segment. Hopefully, we will keep on building on such excellent initiatives and expand on our pool of solutions.