When Rajiv C Lochan took over as the managing director of Chennai-based Sundaram Finance Ltd in April 2021, he had no playbook to turn to. India was battling a devastating second Covid wave that ravaged lives and businesses.
In a company guided by the “provide the umbrella when it’s raining” principle, it wasn’t easy but Lochan, who has worked extensively in the financial services space, drew from his time with global players like AMEX and McKinsey, to steady the ship.
Before joining the diversified financial services group, he was the MD of Kasturi & Sons, the owner of The Hindu Group of publications, his first stint outside the financial services space.
Lochan’s term has also coincided with a big push for electric vehicles. For an NBFC whose “bread and butter” is lending to commercial vehicles, that is a huge disruption.
In an exclusive interview to Moneycontrol, Lochan talks about how the company is viewing the EV space, its approach to the nascent co-lending business and how the 67-year-old company is making the digital shift without compromising on its values. Edited excerpts:
How is the business after the second Covid wave?
It was a tough first six months. Every month since Wave 2 has been getting progressively better. The second quarter was reasonable for us, and the festival season has gone on well. The good news is that the customer, manufacturer and people's sentiment is upbeat. Demand is holding up very well. Confidence seems to be back and we seem to be in reasonable shape at the moment.
Sundaram Finance’s focus for many decades had been on the commercial vehicle (CV) segment. How have the newer business segments done and what are the growth drivers?
There are three vectors around which we look at opportunities—one is the asset class and the other is geography. The third is the form itself – internal combustion engine (diesel/CNG/ biofuel) vs electric vehicle. For a long time, we were known as a player in the CV space. That still is our bread and butter, we have, over the last two decades, expanded our presence in the car, construction equipment and tractors and farm equipment segments. We now have a reasonably well-diversified asset class.
Within the CV space, we had begun as a large player in the M&HCV (medium and heavy commercial vehicle) space. However, we have diversified into LCV (light commercial vehicles), SCV (small commercial vehicles) and ICV (intermediate commercial vehicles).
Currently, we have a 50:50 mix between M& HCV and LCV/ICV/SCV space within the CV slice. Overall, CV contributes to 45 percent of our book, while the car segment is at about 25 percent. Tractors and construction equipment contribute one-fourth.
We believe that the tractors and farm equipment segment is structurally very sound and a prosperous segment and holds a lot of promise for the long term. There is much happening there.
The construction equipment segment, too, is doing well given the national infrastructure pipeline and the government investments there. Both these segments are seeing a lot of traction.
Our strategy is to build heft systematically in each of these segments—commercial vehicles, passenger cars, tractor and farm equipment and construction equipment. Geographic expansion is an important priority for us. We have established a good national presence, and there is a clear road map to deepen and strengthen our geographic presence, expand our branch network and build customer connect. There is a lot of headroom to grow in the geographies that we are already present in.
Electric vehicle (EVs) is the most talked-about segment. Are you looking at this space?
EV is a whole new game-changer. We have to understand the dynamics of the category. The battery is said to have a shelf life of three to five years and constitutes about 30 percent to 50 percent of the overall vehicle cost. There are multiple battery models. It is an evolving space. The total cost of ownership is the one to get our hands around the vehicle for the customer. That is not well established right now. We are doing a lot of projects in the three-wheeler segment and have set aside a small pool to take risks and learn. We are underwriting three-wheelers for e-commerce delivery and have done about 40-50 deals. We are studying a lot on the four-wheeler space in the EV segment, and have been talking to all the OEMs (original equipment makers) to understand their plans. We are also looking at the global trends in this space to understand the segment better.
Have you expanded into any other vertical recently?
Outside of the road transport sector, we are looking at MSME as a separate vertical for the long term. We are trying to understand that space. It is only a small, close to a Rs 500-crore book just now. We are systematically looking at secured lending (working capital demand loans, machinery term loans, enterprise business loans) in the textile, auto component, pharma, life sciences and supply chain space. There are a lot of interesting possibilities in this sector.
Are you looking at co-lending with banks?
The concept of NBFCs (non-banking finance companies) co-lending with banks is beginning to pick up now. The spirit of co-lending is that it has to be a win-win scenario for both partners. There is a set of pre-agreed credit criteria between the bank and the NBFC. One of the partners originates the customer and it sits in the books jointly in a pre-fixed ratio. Collections go into the books in the same proportion as the disbursements. EMIs are cleaved in the same way. This is still in its early days, and we are studying as to which geographies and what asset classes will work for us in terms of the strength that we bring or a desire for us to go in a particular geography.
With co-lending, there is a genuine way to take advantage of the strengths of the NBFC and the bank and build the book of both the partners. We, as the NBFC, could provide the last-mile connectivity, origination, collection and servicing. We believe that the customer stands to benefit as the individual strengths of each of the partners can be leveraged well and passed on to the customer.
Given the coronavirus pandemic, how has the non-performing asset (NPA) situation unfolded?
The pandemic and the unprecedented healthcare crisis led to an asset quality impact that we have not seen since the economic crisis of 1997-98. The good news is that we have a lot of people who were part and parcel of that era and there is a lot of wisdom and experience available within the company. The view we have taken—and our founder chairman always said that—is that when it’s pouring, we should not take the umbrella away.
In Wave 1, we handed the moratorium generously, while in Wave 2, we have provided the restructuring in a reasonably calibrated way to as many customers. Wave 2 put a lot of expenditure pressure on our customers. Over 1,000 of them lost their lives due to Covid. That has increased significantly their healthcare expenses. They were understandably not able to pay their dues.
The fuel price has gone up in the last 12 months quite substantially, while the freight rates have not moved up. So, the viability has been crunched. There has been a cash-flow issue. A few segments such as the large school bus segment and the tourism-related bus segment, particularly in Kerala, have been under stress. So, a number of complications have resulted in the system as a whole. Perhaps, the biggest trigger was that there was no moratorium in the second wave like we had in the first. What that did during the second wave was that there was no standstill provision and accounts were rolling over into the next buckets. We prioritised safety over commercials.
In the last few months, we are beginning to work back. Our gross NPA level in Q2, even at 3.6 percent, is still best in the class compared to the industry but our focus is to get it back to our own high standard as much as we can to where it was pre-Covid. This is the period after the storm, with the customers rehabilitating and coming back. How we navigate the next two quarters will give a fair indication of how well we have cured ourselves from the Covid hit and how resilient our quality has been.
How is Sundaram Finance adapting to changes in the external environment?
The tag line of Sundaram Finance “Enduring Values-New Age Thinking” nicely captures the fact that you can be value-oriented and still have an analytical numbers-oriented approach. There is a tradition we are rooted in. The physical and human touch is important and that will not go away.
Our founder’s philosophy was always to provide the umbrella when it’s raining. That’s how our relationship with customers has been built over several decades. It has worked for 67 years, and we will fight to protect it fiercely.
There is a lot of new-age thinking that is evolving because of technology, competition, regulation, availability of data and trends globally, which is giving us new-age thinking. The trick that Sundaram Finance has mastered really well over the last two decades is to blend enduring values and new-age thinking and bring together these seemingly incompatible things. We take time to adapt.
For us, adaptation is a multi-year journey. We had moved from being a predominantly CV financier to CV and passenger cars. In the last two decades, we have established a strong presence in tractors & farm equipment and construction equipment, in addition to CV and cars. Ten years ago, we were 95:5 percent in terms of new and used vehicles financing. That has now changed to 75:25 percent.
Geographically, we have moved from being a TN/south-focused company decades ago to being a national player with a presence across the length and breadth of the country. We first look at where we want to place our bets and once we commit to it, we stay for the long haul. Tractor & farm equipment, construction equipment, EV and MSMEs are areas we see as a structural long-term opportunity. So, we are clearly adapting to changing times but we do not rush our people unreasonably. We look at the long-term horizon in everything we do. We don’t run the quarterly race. It is driven bottom up and people own it. They have shown tremendous resilience in adapting to different opportunities that have come in their way, and we have been successful in adapting to the changes over the last two decades.
How much of a shift have you made towards digital?
There has been an increasing reliance on technology, digital and data. We have made a lot of investments in digital. Our focus is on digitising the internal processes and simplifying the lives of our employees in enabling them to provide a better customer experience.
We have built applications on the mobile where at the point-of-sale our field officers can report live and this is captured in the system. Technology has helped us save about 30-40 percent time on administrative tasks and our executives have been able to spend that additional time with customers and dealers.
Technology is providing a lot of room for us to do more with what we have. There has been a solid foundation already. I believe that technology can unleash the potential of Team Sundaram a lot more.
What’s your aspiration at Sundaram Finance?
It is only eight months since I have taken charge as the MD and it’s been marred by Covid. There is a very long tradition that the company has had of doing things in a manner that is admired and also envied by everybody around us.
The biggest priority for me is to ensure that the tradition of putting the customer first and foremost continues... My priority on the business front is to keep “continuity” as the theme. We will hold on to the time-tested Trinity of GQP (Growth, Quality and Profitability). The clear path laid out from the past will not change.We will continue to look at asset class diversifications, geographic expansion and building the human connect between our people and the customer. We are marathon runners and don’t sprint in the middle of a marathon. As an organisation, we are at a very interesting point. The organisation is now an elder statesman. It’s got experience. It is wise and has the respect of people. The company is now 67 years old. We have to build resilience for 80 years (Sathabhishekam) and 100 years (centenary) of the company and beyond…