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Auto finance: Volumes see a turnarund - Views on News from Equitymaster

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Auto finance: Volumes see a turnarund

Aug 16, 2010

The Indian auto sector has come a long way from the lows of FY09. Auto financing companies, with derived demand from auto sales also showed improved performance. With this in mind we decided to look back into the past two years' performance of leading auto finance companies. Indian industry witnessed a significant slowdown in FY09, with sluggish GDP growth. The economy was reeling from the after effects of the global recession. Auto sales were down, especially those of commercial vehicles, which were 22% lower than in FY08. All other segments of the auto sector also saw either flattish growth or marginal declines. This directly impacted auto financing companies which saw slow loan growth and depressed stock prices.

FY10 also started off on the back foot. Concerns about the sector and economy were still prevailing. A delayed and below normal monsoon also did not help matters. The commercial vehicle financing sector which is highly dependent on the overall economic situation and agricultural growth was the biggest drag.

1HFY10 however saw a turnaround in the space with real GDP growing by 7.9%. By the end of the year, FY10 turned out to be a stellar year for auto companies. Volumes recovered sharply and strong double digit growth was seen across all segments. Passenger vehicle volumes grew by 26%, commercial vehicles by 38%, and tractors by 32%. Even the 3-wheeler and 2-wheelers segments saw above 20% growth. Huge volume growth was very beneficial to auto financing companies like Shriram Transport, Bajaj Auto Finance and Mahindra Finance.

Source: SIAM, Mahindra Finance FY10 annual report

Main drivers for this volume growth in FY10 were as follows:
  • Low fuel prices compared to the highs of 2008 helped reduce cost of owning and maintaining a vehicle
  • Consumer confidence was high with an improvement in income levels as well as better financing means
  • There was an advancement of purchases in 4QFY10, due to an expected rollback of excise duty
  • Accelerated depreciation of 50% on commercial vehicles, as part of the stimulus package announced by the government boosted demand
  • Low base effect of FY09, where most customers postponed purchases due to economic slowdown
The auto financing sector correspondingly saw a good recovery in FY10 after posting a 25% decline in disbursements in the previous year.

Good pick up in growth...
  Advances Disbursements
(Rs m) FY09 FY10 Change FY09 FY10 Change
Mahindra Finance 68,707 84,864 23.5% 62,812 89,154 41.9%
Shriram Transport Finance 179,535 179,650 0.1% 115,654 146,836 27.0%
Bajaj Auto Finance 23,704 40,258 69.8% 24,509 45,851 87.1%
Source: Company annual reports

Future outlook CRISIL estimates that non-bulk freight traffic, the primary driver of commercial vehicle sales is said to grow by 12-13% in the coming year (FY11). Increased industrial production as well as a good monsoon this year will definitely boost sales of tractors and other such vehicles. Passenger vehicles and 2-wheelers have also seen good growth so far in FY11. Construction equipment financing is also going to be a new driver for growth, especially in India which has large infrastructure development needs. It is expected to grow by 25-30% over the next few years.

However, increased interest rates will put pressure on the demand for financing of auto loans. The RBI does not seem to be done with its withdrawal of monetary stimulus as yet. Rising interest rates will also increase delinquencies. Hike in prices of fuel, post the deregulation of petrol and diesel prices may put an end to the ‘honeymoon period' for the industry.


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