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Mah Fin. vs. STFC: The better vehicle lender?

Jan 10, 2011

The Indian financial sector is quite diverse. Banks are the backbone of the financial system. There are also a number of non-banking finance companies (NBFCs) in various niche industries. In this article we focus specifically on the auto financing industry. Typically players in this space have higher margins and profitability versus traditional banks. Their NPAs (non performing assets) tend to have high fluctuations depending upon the economic cycle. We shall compare the two largest players in this sector - Shriram Transport Finance Company (STFC) with Mahindra Finance (Mah Fin.). Being in the auto financing space, both lend to the priority sector including farmers, truck drivers etc. But, they are also different in many aspects.

Business model

Shriram Transport has a niche presence in financing used trucks. This business provides it relatively higher lending yields, compared to lending for new trucks. Funding used trucks instead of shiny, new vehicles started off as a strategic business decision. STFC realised that most truck owners, had the ‘dream' to buy new vehicles but not the ‘ability' to act on it. This poorer segment of society wanted to get off the bottom rung, but they did not have the requisite net worth at their disposal to buy brand new vehicles. From this insight, funding pre-owned vehicles started. STFC is now India's largest asset financing NBFC having amassed 30 years of experience in the field. It has a 20-25% market share in pre-owned truck financing and 7-8% market share in new truck financing.

Mahindra Finance, a 60% subsidiary of auto major M&M, is one of India's leading NBFCs focused on the rural and semi-urban sector. It provides finance for utility vehicles, tractors and cars and has the largest network of branches covering these areas. The company principally finances M&M utility vehicle (UVs) and tractors, and has been attempting to diversify its asset base to cover non-M&M vehicles (besides tractors) as well. Mah Fin. initiated financing of commercial vehicles and two wheelers in FY07 and rural home loans a year later. It is also the ‘preferred financer' for Maruti, especially in the non-metro areas. It has also benefited from M&M's acquisition of a controlling stake in Punjab Tractors, the second largest manufacturer of tractors in India.

Vehicle Mix

Mah Fin. has a bias towards tractors, cars and M&M vehicles. STFC on the other hand doesn't have a preferred manufacturing partner and its focus is mainly on used trucks.

Around 33% of Mah Fin's disbursements are cars, leading to the company being able to play to India's rural consumption story in a big way. In this sense it has an upper hand over STFC. Both companies however, have significant exposure to the diesel driven CV (commercial vehicle) space. If diesel prices get deregulated in the future, both companies may face issues.

 
Source: Investor Presentations    Note: Others include non-M&M utility vehicles

Both players are now pushing for a significant entry into the construction equipment financing space. This is in light of the increased allocation to infrastructure in the 12th five year plan. STF has set up a subsidiary for the same in 2010. Mah Fin has been operating in this space since 2008, and expects this business to clock good growth going forward.

Yields on loans

Lending yields or yields on loans is a metric of how profitable the company's earning assets (loans) are. Mah Fin earlier had significantly lower lending yields compared to STFC. This was mainly due to a higher percentage of newer vehicles. Used vehicles are only 8-9% of the product mix, compared to 80% for STFC. As we mentioned earlier, funding used trucks is a great value proposition. It provides STFC with 18-24% yields compared to 15-16% for funding new vehicles. But Mah Fin has now playing catch up for the past few years. The company's yields are now 18% (FY10) compared to 20% for STFC. It has consciously been trying to increase the financing of other vehicles. It has been changing its disbursement mix, and most of its incremental disbursements now are now going towards cars and other CVs. This change in product mix has helped improve its yields. Also allocation to the higher yielding used vehicles space has increased. This formed only 1% of the portfolio in FY08, which has increased to 8% in FY10 for Mah Fin.

Source: Equitymaster research, company reports

While asset mix and lending yields throw light on few important aspects of their businesses, we shall delve on the quality of their assets and long term shareholder returns in the next article.


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