Apr 10, 2013 08:11 AM IST | Source: CNBC-TV18

CV segment seen struggling; but no alarms yet: Experts

Credit rating agency CRISIL expects loans to Indian truck and bus operators show signs of weakness, which will be a first in nearly three years, underlining the scale of the slowdown in country’s transportation industry as economic growth stutters.

Credit rating agency CRISIL expects loans to Indian truck and bus operators show signs of weakness, which will be a first in nearly three years, underlining the scale of the slowdown in country’s transportation industry as economic growth stutters.

Repayments on loans by commercial vehicle owners have fallen significantly over the past year, according to the CRISIL report, raising fears of a rise in non-performing assets (NPAs) as the industry battles rising fuel costs and slowing freight demand.

"We found that recently the collection efficiency trends have actually been showing a declining trend and for the first time in three years they have dipped below 95 percent, which is a level that we last saw in 2009 and that was the period immediately after the economic shock that we saw," Pawan Agrawal, director, CRISIL Ratings told CNBC-TV18 in an interview.

Sales of medium and heavy goods vehicles in India fell by about 25 percent in the first 11 months of the financial year that ended in March, according to industry data, as sluggish economic growth curbed sales for companies such as Tata Motors, Ashok Leyland and Eicher Motors.

A protracted slowdown in India's mining industry and sluggish industrial output growth have compounded the fall in heavy goods vehicle sales, as company's delay or abandon upgrades to their fleets.

However, Vellayan Subbiah, MD, Cholamandalam Investment says the quality of CV assets is still good and there is nothing "alarming" going on in the segment. "We might be getting a bit caught up with a base effect issue here because last year was a historic low for the industry. We are definitely in the better half of the cycle because we are still significantly lower than our mean," he highlights.

Below is the verbatim transcript of his interview to CNBC-TV18

Q: Take us through the nuances of this. When you say Commercial Vehicles (CV) do you mean the entire range? Do you mean there is more in Light Commercial Vehicles (LCV) and less in the Heavy Commercial Vehicles (HCV) or is it the other way around? After all sectors like mining were affected, is it that HCVs suffer, but LCVs are doing decent?


Agrawal: This study is something that we did, based on the securitization and the tracking of securitization performance that we do. We have about 80 pools that we have securitized, that together amount to about Rs 18,000 crore of assets. We track in these pools on a monthly basis, what is the collection efficiency and how is it panning out.

When we noticed the collection efficiency trends, we found that recently the collection efficiency trends have actually been showing a declining trend. For the first time in three years they have dipped below 95 percent, which is a level that we last saw in 2009. That was the period immediately after the economic shock that we saw.

Q: Would it be fair to assume that this segment is dominated more by Non-Banking Financial Companies (NBFC) than by banks?

Agrawal: If one looks at the originators primarily this is where a lot of large NBFCs have a good and strong presence. We also have some of the private sector banks, which also have a presence.

However, from a bank’s perspective this is an asset class, which is relatively small. It is primarily much more relevant and larger for the NBFC segment.

Q: Do you agree with research which is done by CRISIL? Have collection ratios of securitization pool worsened a bit in the month of March? How are you viewing the trends? Is there a possibility of a rise in Non-Performing Asset (NPA) levels on the back of this?

Subbiah: My take is that the quality of CV assets is still very good. Based on our historic data average credit losses over the cycle for these assets have ranged between 0.75 and 0.9 percent. Currently for Chola they are running at 0.62 percent.

So, we are still well below what we see in terms of our historic data, as our means including the data points in 2009. So, first off we are definitely in the better half of the cycle because we are still significantly lower than our mean. We might be getting a bit caught up with a base effect issue here, because last year was a historic low for the industry.

Our net credit losses were at 0.54 percent, which is way off the industry average. So, one could basically say it is the best performing year we have ever seen in the history of CVs. So, part of what you might be seeing from Pawan’s report is basically to compare it to last year, when we are a bit worse off, but I do not think there is anything alarming.

_PAGEBREAK_

Q: When a study says that the collections are lower than they ever were in the last three years there is something that that study is telling you. So as an industry veteran can you give us more granularities on this?

Subbiah: You are exactly right. What you have is behaviour in certain pockets and in certain sectors. If one takes the mining belts for example of Odisha, Karnataka with Bellary and Goa, those explain almost 60 percent of the deterioration in quality from last year.

So, 60-70 of the delta quality from last year is basically explained by that. The rest is almost full explained by the performance of large fleet operators in the HCV segment. As one knows the large fleet operators in HCV usually cater to more productive asset classes, which have got slightly hit.

Almost all the deterioration that we are talking about has been driven by those two pockets. One is geographic pocket and one is more customer segment driven pocket. The important thing to keep in mind is that when one is at a peak of a cycle as in kind of good performance, the one thing that is always true in statistics and finances the things have to tend towards a mean. So, to assume that they do not tend towards a mean or the NPLs are headed towards zero is definitely a bad assumption.

Q: You have said in your report that sub-par collection levels may continue over the next three quarters ended December 2012. Do you see the situation worsening?

Agrawal: We are likely to see some additional pressure on the portfolio. I would tend to agree a little with Subbiah that it is not necessarily uniform across. There are pockets which are under higher pressure than the others.

So, clearly the HCVs among the CVs is where the pressure is a little higher, but we expect that given some of the trends that we are seeing of higher input prices, specially the fuel prices and sluggish demand for some of these industrial goods. Some of these trends may continue for a little longer from here.

Q: What is the sense you are getting from hereon? Will the slowdown or the extent of stress is going to worsen, perhaps spread to even Medium Commercial Vehicles (MCV) or will it be the other way around?

Agrawal: I think for now it is something which is very, very clearly visible on the HCV side. If the economic trends continue to be the way it is specially for the industrial goods, all the sectors which are linked including MCV are where we will see some pressure happening.

In addition the element that we need to note is the fact that the margins for transport operators are declining primarily because of the input cost increase. If the input cost keeps increasing the way that we expect the diesel prices tend to continue. There will be some pressure that we will continue to see.

Q: Are you getting a sense that fourth quarter was worse than third quarter for industry, I am referring to Chola and will the April quarter bring worse news?

Subbiah: March usually tends to be the best month for collections for everybody in the industry. So, in general everybody at least from what we get a general sense of seems to have had a very good ending quarter. I would agree with Pawan, there is couple of things, when one takes LCVs and mini LCVs.

We see their performance being much more linked to the consumptive end of the GDP. We have not seen any mass deterioration in the consumptive end, especially when one gets out of the tier-1 cities. So, there are not any massively alarming signs there yet. Like Pawan said there are a couple of pockets. The mining belt has gotten hit and large fleets have gotten hit.

Sections
Follow us on
Available On