Witnessing demand pick-up for M&HCV in coal belt: Experts

A report by Religare Capital Market says the worst for commercial vehicle and construction equipment (CV/CE) lenders is coming to an end after 20 years backed by strong cyclical upturn, lower fuel.The author of the report Parag Jariwala of Religare Capital says the Medium and Heavy Commercial Vehicle (M&HCV) sales have risen 30-40 percent Year-on-Year, over the past six months. He also expects the small CV players to enter the market in a big way once the economic recovery picks up.The house is very bullish on M&HCV lender Shriram Transport Finance with a target price of Rs 1500 in next one year. Jariwala expects a 20-23% CAGR in disbursement growth for shriram in the coming 3 years.Umesh Revankar, MD, Shriram Transport Finance Company also agrees with Jariwala and says the company has witnessed demand uptick for heavy vehicle loans backed up pickup of activity in imported coal in areas of Madhya Pradesh, Andhra Pradesh, Jharkhand, Odisha. There has been demand from truck buyers both from fleet and as well as some single buyers. The activity has mainly picked up for transport of coal between ports to power generating areas, he adds.Revankar says customers today are better off than they were a year back and are able to generate monthly movement expect for geographies impacted by unseasonal rains and crop damages.The movement in steel too has picked up but not so much in cement and construction, says Revankar.Demand uptick could lead to a rise in net yields to the tune of 5-6 basis points this quarter too. In the third quarter to it rose 6 basis points, says Revankar.

Below is the transcript of Umesh Revankar and Parag Jariwala’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: You say the worst cycle for commercial vehicle (CV) lenders in the last 20 years is coming to an end. What makes you believe that? Jariwala: If you see M&HCV volumes, the volumes are already gone up by 30-40 percent year-on-year (YoY) in last three to four months. We have done a lot of channel checks and that suggests us that delinquency rates have stabilised since last six to nine months. The bucket movement for the non-performing assets (NPA) are also not happening currently. Currently only the large fleet operators are buying into the markets but as recovery gathers pace we think that a lot of small and marginal CV operators, which accounts for more than 90 percent of the market will come in a big way because there is a lot of pent-up demand which is waiting idle, which can come up and the growth rates could be much stronger than even what current market situation suggests.Latha: Does that square with what is happening at your offices, are big trucker’s coming and taking loans at all, are small trucker’s not taking loans? Revankar: There is definitely demand coming up. We are witnessing demand for heavy vehicles in coal belt that is Jharkhand, Chhattisgarh, Odisha, Madhya Pradesh (MP) and Andhra Pradesh. Coal movement in last two months has been quite high and it is not that local coal movement, it is the imported coal because all these energy producing companies are require coal and they have started their activities. You can also see electricity generation has gone up Y-o-Y by more than 12 percent across. So, the coal movement is quite high from the port to the power generating site. So, that is one activity and steel movement is also quite good. However, the cement movement has not gone up yet. If steel and cement together goes up that means infra activities are going up and the private building activities are going up. In that case there will be definitely more demand coming. So, we are witnessing demand for truck buying and it is not just fleet operators. Fleet operators basically is a replacement demand but also from the single operators. The single operators are seeing some opportunities in the niche segment of haulage of coal from port to power site right now.Latha: Does this mean that bad loans are coming, at least petering out because trucker’s are getting more business? Revankar: Bucket movement has virtually stopped so the customers are better off than what they were around six months or a year back. So, that is a big relief for the customers. They are able to generate monthly revenue quite comfortably now. So, this is definitely a positive. Only in certain geographies where we had unseasonal rain and some crop damage we have some difficulties. Otherwise generally the customers are better off because of fuel price coming down. They are at least able to repay their monthly installments quite comfortably, if not the old arrears. Sonia: What exactly is your exposure to the agri sector, how much do you lend to players in that sector and because of the unseasonal rains what could the impact be? Revankar: The report says that it is an 5-20 percent damage in Punjab, Haryana, Uttar Pradesh (UP), Maharashtra and some part of MP. We did try to understand how much it will impact our customers. Right now the impact to our customers doesn’t seem to be big because we don’t lend to new tractor buying in a big way. We lend for used tractors which are basically used for commercial purposes and agri purpose. So, none of our lending would be direct agri, it will be indirect agri. So, I don’t think that will have an impact on our portfolio.

Latha: Take us through your best buys in the space?

Jariwala: Our top pick continues to be Shriram Transport Finance in this space. Mainly because what we think is as the CV market recovery becomes broad based many small players will come back in the market. Last two years the used CV market churning has been virtually stopped at least in the plus seven years old vehicle category. So, we think that disbursement growth for Shriram Transport could be much higher overall volume growth be which we are projecting at around 20 CAGR.