Used Commercial Vehicle Finance - Future Leaders in - July 2021 - Avendus
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Future Leaders in Used Commercial Vehicle Finance July 2021
Table of contents
1. Vehicle Finance – An introduction 03
2. Recovery on the cards 04
a. Covid-19 impact 06
b. Cautious recovery 09
c. Government reforms 10
d. Long-term view 13
3. Key offerings in Vehicle Finance 15
4. Key NBFC players serving the market 17
a. Who are the leaders? 19
b. Who are the emerging leaders? 22
5. The road ahead 28
6. About the authors 30
Glossary 31
Sources 32^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 3 1. Future Leaders in Used Commercial Vehicle Finance: An Introduction The vehicle finance industry in India is set to make a comeback. We believe the used CV segment, particularly LCVs will witness major growth coming in from rural India. In the spotlight, we have case studies of three key players who are bound to capture market share as the move from unorganized to organized is underway – Cholamandalam, Ess Kay and Kogta. Cholamandalam is the leader in used LCV financing, focused on a granular and diversified portfolio, trading at 4.0x+ P/B in the long term with ROEs in the mid-teens.[1] We expect emerging leaders like Ess Kay and Kogta to command c.15% market share in the next five years through their differentiated capability, granular portfolios, and tech-focused approach.
^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 4
2.
Vehicle finance –
Recovery on the cards
Growth in Indian vehicle finance space has been subdued due to various
supply demand related issues, alongside institutional reforms. COVID-19 with
its challenges did not help the sector either.
However, swift bounce back from last year’s dip in performance points
towards a sharper recovery this time around. As the vehicle industry is
cyclical in nature, with the next upcycle and government push, it looks like the
industry is set for expansion.
We remain most optimistic about used CV and PV financing segments in
vehicle finance, cementing our long term conviction in asset-based financing.
EXHIBIT 01
Vehicle finance has been languishing in India…[2]
CAGR: 11.5% CAGR: 7.0%
7.6
7.1
6.2
5.6
5.0
4.0 4.3
3.7 [3] [4]
c. 50% c. 40%
Share of Share of
NBFCs in CVs in total
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Vehicle vehicle finance
Vehicle finance AUM (INR in trillion) financing AUM^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 5
Before COVID-19 struck, vehicle loan
disbursements for NBFCs were already
slowing down. Reasons?[5]
DELAY in already weak demand LOWERING of LTV due to higher risk
because of BSVI transition. perception.
DECLINE in retail prices as dealers IMPACT of GST and liquidity crunch.
offered cash discounts to push sales.
New CV sales in India were languishing under the impact of new axle-load norms and BSVI transition.
Total CV sales for FY20 were 0.7 million, down from 1.2 million in FY19.[6]
M/HCV volumes contracted by 32% YoY in Although the LCV (truck) segment was
FY20 as overcapacity in the system and relatively less impacted by the axle load
tighter financing owing to a liquidity crunch norms, volumes were down ~20% in FY20
played spoilsport, with pressure largely owing to the slowdown in consumption-
[7]
visible in the HCV segment (>12T). driven sectors and the rural economy, a strict
[8]
financing environment and high base effect.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 6
2a.
COVID-19 didn’t help matters
but H2FY21 was one of the
best periods for lenders
Market sentiment remained weak as slowing
economic growth and COVID-led disruptions
impacted freight availability
ECONOMIC CONTRACTION LAUNCH DELAYS
Core sectors, manufacturing and OEMs delayed new product launches
construction, contracted 1.4% and due to supply chain disruption and
2.2%, respectively, during Q4FY20, lower demand perception. Surplus cars
indicating sharp contraction in with fleet and rental companies kept
economic activities, leading to freight demand for new cars subdued.
capacity concerns.[9]
LOW FLEET UTILIZATION PV SALES PLUNGE
Low fleet utilization also impacted Passenger vehicle sales in India
by shortage of drivers, raw material plunged 78.4% in Apr-Jun 20.[10]
availability and rise in commodity prices.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 7
Vehicle financiers witnessed high proportion of loans under moratorium due to significant borrowers’ cash
flow disruption and a higher share of cash collection in the total collections. Collection efficiency of vehicle
financiers trailed the levels of mortgage-backed lenders. Concerns in the space were visible in market pricing
of some listed players in the space as stock markets acted jittery.
EXHIBIT 02
Collection efficiency of select players during moratorium (%)[11]
90%
85% 85% 83% 85% 85%
80% 80%
75%
70% 73% 76%
70% 70% 70%
60% 60% 60%
55%
45% 45%
40%
30%
15%
10%
VF Affordable housing Secured SME Unsecured SME MFI
Mar-20 Apr-20 Jun-20 Jul-20 Aug-20
Top asset financiers were reporting collections of near 100% with reported GNPAs of 4-7% as of Mar-21.
Sharp bounce back from the Mar-20 lows was witnessed, supported by rising economic activity and improved
collections. Within vehicle finance, demand recovery was swiftest in PV and LCV financiers, with a rise in
transportation of local goods aided by e-commerce penetration.[12]
The positive market sentiment despite the second wave is visible in the valuations for the sector post Q3 &
Q4FY21 results and corresponding economic revival. Q4FY21 was one of the best quarters lenders have had
with largely all asset quality issues priced in.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 8
EXHIBIT 03
Diversified players continue to command premium[13]
GST Implementation COVID-I
(Jul-17) (Mar-20)
IL&FS crisis COVID-II
(Sep-18) (Apr-21)
4.8x Cholamandalam
3.5x
3.8x Sundaram
2.8x
2.0x
1.8x 1.7x Shriram
1.1x Mahindra
Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Jan Jun
16 16 16 17 17 18 18 19 19 19 20 20 21 21
TTM P/B of key players in the space
Disbursement in Q1FY22 is expected to be c.50% of Q4FY21 levels, as lenders disbursed loans cautiously,
choosing to focus on collections and recovery instead. Analysts predict ~10 bps rise in GNPA for new CV
and ~20 bps rise for used CV financing in FY22 as early signs of COVID-II impact. This was caused by the
borrowers’ weakened economic standing and collection challenges faced by lenders.[14]
Though the second COVID wave come at a time when lenders were just gathering momentum, a speedier
recovery is expected this time around, with lenders benefiting from last year’s experiences and provisioning
buffers. A relatively relaxed lockdown with no restriction on movement of goods augurs well for the segment.
With a sharp decline in cases and gradual opening up of pockets in the country, we expect July/August to be
normal months for lenders, where growth and collections will be back to pre-COVID levels.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 9
2b.
Cautious recovery is expected
from the next economic upcycle
Improving utilization levels E-WAY BILLS CROSS PRE-COVID PEAK
for CVs, higher demand for
Toll collections have surpassed pre-COVID levels and
used vehicles, and liquidity
E-way bill generation in Feb-21 is up 12% YoY. Industrial
are leading to improvement
production, port data and railway freight are now on the
in disbursements for asset
expansion path. Road construction projects are reactivated.
financiers.
Oil marketing companies (OMCs) are renewing oil tanker
contracts with BS6 vehicle suppliers.[15]
Fleet utilization for CVs
was low at 15-20% during PREFERENCE FOR PERSONAL MOBILITY DRIVING PV SALES
the early stages of the Retail festive sales improved sequentially in the case of
nationwide lockdown. passenger vehicles. By Aug-Sep 20, sales in most product
It had been trending at categories picked up to prior year levels. PV sales for the
75% at the industry level industry improved significantly to nearly 100% of prior year
(above 90% for organized levels in Q2 from sub-30% levels in Q1FY21.[17]
players).[16]
However, with the current AGRI PRODUCTION AT AN ALL-TIME HIGH
second wave of COVID-19 With three consecutive healthy harvesting seasons, total
sweeping the nation, it agricultural production touched a fresh high of 296 mt.
remains to be seen how This bodes well for disbursements as well as collections
the lessons learnt from in product segments like 2-Ws, Tractors and PVs in rural
last year can be benefited areas.[18]
from as a hit to the
economy is anticipated by
experts from month-long PREFERENCE FOR LAST MILE DELIVERY WITH BUSINESSES
the lockdowns in various SHIFTING ONLINE
states between April and Demand from the e-commerce, FMCG, textile and
June 2021. consumer durable sectors has picked up significantly.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 10
2c.
Government reforms
to further fuel growth
Budget 2021 – Vehicle Scrappage Policy to increase sale of
new and old Vehicles[19]
The policy proposes that commercial vehicles be deregistered after 15 years in case they fail to get the
fitness certificate and private vehicles be deregistered after 20 years if found unfit or in case of a failure to
renew registration certificate.
As per the new policy, vehicle owners scrapping their old vehicles, could get strong incentives, including a
25% rebate on road-tax for personal vehicles (15% for commercial vehicles), a 5% discount on purchase of
new vehicle against the scrapping certificate, among others.
Consumers will also get scrap value for the old vehicle given by the scrapping centre, which is approximately
4-6% of ex-showroom price of a new vehicle. In addition, the registration fees may also be waived for the
purchase of a new vehicle against the scrapping certificate.
EXHIBIT 04
Vehicle Scrappage Policy (at a glance)
CV PV
Policy deregistering vehicles (years) >15 >20 (Found unfit, failure to renew registration)
Strong Incentives for vehicle owners scrapping their old vehicles (against the scrapping certificate)
Rebate on road-tax 15% 25%
Scrap value for the old vehicle ~4-6% (of ex-showroom price of a new vehicle)
Registration fees for new vehicle 0% (waived off)^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 11
There are c.1 million commercial vehicles in India, which are more than 15 years old. Scrapping them will
create replacement demand and modernize the commercial vehicle fleet in the country. The replacement
demand will be nearly 1.5 times the average annual sales of new CVs. The market potential can be an
addition of approximately USD 15 billion to the sales of new commercial vehicles.[20]
EXHIBIT 05
Replacement demand of CVs[21]
Replacement demand
1.5x
Avg. annual sales on new CVs
c. 1 million Market potential
in India USD 15 billion
>15 years old Scrapping addition to new CV sales
The policy should lend further impetus to pre-owned vehicle demand over the short term (FY22-FY23) as
demand and attractiveness of used CV will also become a function of the valid years left before the due
fitness certification.[22]
BSVI transition –
Will lead to uptick in used CVs
Upon transition to BSVI emission norms in Apr-20, CV prices have increased by 10-15%. This
has translated into a 5-6% rise in used CV prices.[23]
Used CV prices are expected to pick up further in H2FY22 as demand revives with customers
expected to add or replace their vehicles with ones of lower vintage in order to conserve cash
and mitigate the steep cost of BSVI vehicles.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 12
Railways’ DFCs – Will increase freight
tonnage and demand for LCVs
DFCs are set to reduce cost of freight transport by c.45% compared to road while maintaining
the same delivery time. We expect this to lead to overall growth in freight transport in the
country and increase share of railways in freight transport from current 26% level. While MHCV
demand may decrease as more FTL freight will move towards trains and existing MHCV stock
may be able to deliver higher throughputs, LCV demand will increase going forward as higher
tonnage will require to be transported intra-city from railheads.[24]
Construction of Expressways – Rise in freight volumes and
consequent demand for LCVs
Government focus on constructing long distance expressways (eg. Delhi-Mumbai Expressway)
should reduce cost of inter-city freight transport leading to a consequent rise in volumes. LCV
segment is set to see additional demand for last mile connectivity of the goods.
Push for EVs –
Replacement demand for LCVs
Government reforms in the EV space will first be pushed in cities due to environmental
concerns. As most transport in cities happens through LCVs, replacement demand will first
come in LCVs and much later in MHCVs.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 13
2d.
Long-term conviction in
the space will see fruition
Strong underlying demand for new and pre-owned
vehicles
EXHIBIT 06(a)
Volume of CVs sold (in millions)[25]
DRIVERS FOR GROWTH
CAGR
11% • Growth in consumption and e-commerce
1.2 1.8 sectors to drive logistics demand.
FY19 FY23E • Government focus on road infrastructure,
rural income, scrappage policy to boost
sales.
HCVs 24% CAGR 20%
12%
LCVs 76% 80% • Strong potential for pre-owned CVs since
on an average, one truck changes hands
YIELD (%)
with 2-3 owners.
New Pre-owned
Customer Product • Increasing focus on SCVs and LCVs
CV CV
financing with higher yields, less chunky
Large Fleet operator MHCV 11-12% 12-13% loans, and lower non-repayments.
• 18-20% higher cost of BS6 vehicles,
Medium Fleet operator MHCV 15-16% 16-17%
leading to higher demand for used CVs.
Small Fleet operator LCV 16-18% 18-20% • High growth in demand of used LCVs with
an uptick in the rural economy.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 14
EXHIBIT 06(b)
Volume of PVs sold (in millions)[26]
DRIVERS FOR GROWTH
CAGR
7% • Burgeoning middle class and higher
3.2 4.2 disposable incomes to benefit PVs.
FY19 FY23E • Lower cost of capital to encourage
spending among individuals.
PENETRATION OF PV FINANCE (FY20)
[27]
• Pre-owned cars sold in FY18 were more
than 2/3rd of new car sales (in value terms)
80% in FY18.
20% Banks majorly cater • In the future, it is expected that the ratio of
to/ dominate this new car to pre-owned car sales will be 2:3,
space similar to developed economies like
Germany, UK and Brazil.
Pre-owned New^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 15
3.
Key offerings in the
vehicle finance space
Banks typically finance urban salaried borrowers in the PV segment,
whereas NBFCs mainly cater to self-employed and rural borrowers
who don’t have access to bank finance.[28]
Used CV & two-wheeler financing have become the stronghold of
NBFCs due to their greater ability to tap regional rural markets, by
offering financing at much lower rates than the unorganized sector.
EXHIBIT 07
Vehicle finance sub-segments[29]
Lending For New CVs Used CVs PVs 2-W Tractors CEs
Customer Fleet Small Road Salaried/ Mass Rural Construction
segment operators Transport Urban companies,
Operators contractors
(SRTOs),
Owners,
drivers
Ticket 1.5 Upto 1 0.2–1.5 45–50 0.3–0.4 1–30
size (in INR) million million million k million million^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 16
Serviced mainly by OEMs & NBFCs
Others (CEs, tractors, 2-Ws)
M/HCVs – Fleet operators Banks focus mainly on new CVs
NBFCs dominate the used CV financing
S/LCV and Used MHCV – FTU/ SRTOs
Serviced mainly by banks
UVs, PVs – Individuals & rental companies
CVs Used CVs PVs
Share of organized financing Demand for used CV Finance penetration is high for
in new CVs (mainly MHCVs) financing expected to be new PVs, particularly in urban
is already high, led by higher relatively better due to areas. Thus, disbursement
ticket sizes involved, along lower EMI burden, and some growth for new PVs expects
with relatively better customer replacement demand with to mirror the trends in retail
credit profiles. the scrappage policy getting sales.
implemented.
LCV financing is on an upward With organized financiers still Scope remains for relatively
trend with inroads made by a having only ~60% market higher growth in the used PV
few larger financiers into rural share in the used CV segment, and 2-W segments over the
markets through their strong there remains scope for gains long-term given low level of
ground level networks. from unorganized players.[30] current finance penetration.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 17
4.
Key NBFC players
serving the market
Within the NBFC sector, there are various players with a niche focus or customer strategy. While some focus
on HCVs, others focus on LCVs, used v/s new, rural (tractors), etc. Diversified lenders are better placed to
navigate the various asset level and economic challenges.
EXHIBIT 08
Key NBFC players serving the market
% mix of NBFC AUM as of FY20[31]
90%
80%
70%
60%
50%
40%
30%
20%
(17% CVs+CEs)
(17% CVs+CEs)
10%
0%
CVs PVs Tractors (Agri) CEs 2-W Used Vehicles^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 18
EXHIBIT 09
Diversified vehicle financiers exhibit
superior multiples and valuations[32]
(Bubble size denotes Market Cap)
30%
20%
% return on avg. equity (FY21)
10%
0%
(10%)
(20%)
(30%)
0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x
TTM P/B multiple^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 19 4a. Who are the leaders? As evident in the asset financier landscape, most players are diversified into over two categories. More diversified loan books (both by products and geography) can shield the player from cyclicality and provide flexibility to reorient the portfolio based on market opportunity. Less chunky loans in the product portfolio reduce the quantum and probability of any asset quality issues affecting the whole business. This explains why LCVs and MHCVs have gained preference by the asset financiers in the CV category lately. This also stems from the fact that the target customer is an SRTO and not a big fleet owner with more bargaining power. More rural and semi-urban presence positions a company to gain market share in this space as rural demand recovers faster.
^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 20
| CASE STUDY – Cholamandalam[33]
Cholamandalam’s diversified AUM mix, with less chunky HCV loans
driving better asset quality, has led to wealth creation over time.
EXHIBIT 10
Vehicle business AUM, growing at 20% CAGR over a large base
CAGR: 19%
504
406 442
315
176 201 236
FY15 FY16 FY17 FY18 FY19 FY20 FY21
EXHIBIT 11
Vehicle AUM mix(%)
8% 7% 6% 6% 8% 5% 5%
28% 28% 26% 26% 25% 26% 26%
9% 7% 7% 8% 10%
10% 10% 3% 4% 5% 5%
6%
13% 14% 17% 19% 17% 13% 10%
26% 25% 22% 22% 22% 26% 25%
15% 16% 17% 16% 16% 17% 17%
FY15 FY16 FY17 FY18 FY19 FY20 FY21
Cars and MUVs HCVs Tractor 3-W & SCVs
LCVs CE Used/Refinance^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 21
| CASE STUDY – Cholamandalam
PRODUCT DIVERSIFICATION
72% of AUM comprises vehicle finance, while the remainder mainly consists of home
equity. 27% of vehicle finance comprises used vehicles.
SMALL TICKET SIZE
Strong track record in catering to small fleet operators and first-time users with ticket
size from INR 1 Lac onwards.
PRODUCT MIX AND ASSET QUALITY
Management is shifting focus to used vehicles due to higher yields. The company has
still maintained low GNPA, which has reduced from 4.7% in FY17 to 4.0% in FY21.
GEOGRAPHICAL PRESENCE
Present in 29 states and UTs with an extensive branch network spread across North
(22%), South (27%), East (26%) and West (24%); ~80% of total book has rural exposure.
EFFICIENT ALM AND LOW CoF
Exposure to commercial papers (short-term borrowings) is only 4% and half of the
borrowings are term loans.
EXHIBIT 12
Outperforming consistently[34]
Cholamandalam 437
Nifty
222
100
Feb-16 Feb-17 Feb-18 Feb-19 Feb-20 Feb-21^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 22 4b. Who are the emerging leaders? While the vehicle finance landscape has long been dominated by big players like Shriram, Cholamandalam, Sundaram, Mahindra, Magma etc., an emerging breed of smaller asset financiers focused on used vehicles have gained traction in the last 5–10 years. Used vehicle financing (mainly CVs) has witnessed an upward trend and continues to be a space of interest and growth for the asset financiers. With new CV demand still sluggish, a variety of factors are pointing towards a large market for used CV financing. Focused geographical approach leading to sound understanding and track record in local markets, diversified asset mix hinging on used CVs and LCVs, impressive growth, maintained asset quality, use of technology in processes – all this has led to heightened investor interest in such players. In addition to strong collection capabilities, Ess Kay and Kogta, due to their strong regional networks have developed distinguished capabilities in repossession and sale of repossessed assets. This is one of the key reasons why regional NBFCs have garnered investor interest.
^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 23
| CASE STUDY – KOGTA FINANCIAL[35]
EXHIBIT 13
Kogta case study analysis
ASSETS UNDER MANAGEMENT GNPA (%)
(INR IN MILLION) 4.4%
4.2%
12,700
3.3% 3.2%
3.0%
10,716
CAGR: 55%
7.9x 7,222 FY17 FY18 FY19 FY20 Q3FY21
4,347 PORTFOLIO SPLIT (%)
2,390
1,602 LAP LCV, SCV
Tractors & HCVs
22% 43% 70%
FY16 FY17 FY18 FY19 FY20 Q3FY21 8% of the vehicle finance
8% portfolio consists of
pre-owned vehicles
19%
GEOGRAPHIC PRESENCE MUV Cars & 2W
(% OF PORTFOLIO)
4%
38% Delhi (NCR)
Rajasthan
22% 9%
Gujarat Haryana, Punjab & UP
19%
8%
Maharashtra
Madhya Pradesh^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 24
| CASE STUDY – KOGTA FINANCIAL
PRODUCT DIVERSIFICATION
c.80% of AUM comprises of Vehicle Finance while the remainder mainly consists of
LAP/ MSME with c.70% of vehicle finance comprising used vehicles.
TRACK RECORD IN LOCAL MARKET
3+ decades of family legacy and experience in the space helped establish a franchise
that has a keen understanding of local markets.
IN-HOUSE TECH
In-house ERP-based customized proprietary risk management and reporting software
(Accurate) has been designed to improve operational efficiency.
GEOGRAPHICAL PRESENCE
Present in 8 states and UTs with 119 branches and 38,000+ customers;
80%+ of total branches in rural and semi urban areas.
DIVERSIFIED LENDER BASE
Exposure to commercial papers is nil and c. 66% of borrowings are term loans
(banks: 40%); relationship with c. 20 financial institutions.
Backed by Raised c. INR 480 crores over 3 funding rounds in 2016, 2018 and
reputed investors[36] 2019 at attractive valuation.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 25
| CASE STUDY – ESS KAY FINCORP[37]
EXHIBIT 14
Ess Kay Finance case study analysis
ROBUST GROWTH | AUM (INR IN MILLION) INCREASING SCALE WITH
31,554 DIVERSIFICATION |
30,767 PORTFOLIO SPLIT (%)
CAGR: 44% MSME
8.1x 15,506
2-W 2%
9%
12,820
8,245
Tractors 18% CV
5,259 56%
3,878
16%
FY15 FY16 FY17 FY18 FY19 FY20 Q3FY21 Cars
IMPROVING CREDIT RATING
FY12 FY13 FY15 FY18 FY19 FY20
CARE CARE CARE CARE CARE CARE
BB+ BBB- BBB BBB+ A- A
INCREASING GEOGRAPHIC
PRESENCE (% OF PORTFOLIO) 4%
Punjab
69%
Rajasthan
2%
14% Haryana
Gujarat
2% 9%
Maharashtra Madhya Pradesh^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 26
| CASE STUDY – ESS KAY FINCORP
PRODUCT DIVERSIFICATION
91% of AUM comprises Vehicle Finance while the remainder mainly consists of LAP/
MSME, with 70%+ of AUM comprising used CVs.
CUSTOMER PROFILE
Middle and lower middle-class segments in the urban, semi urban and fast growing rural
geographies; ATS of INR 2.65 lacs reflecting granularity.
IN-HOUSE TECH
Uses advance MIS software named ’Fin one neo’ which aids monitoring even through smart
phones; Entire loan origination and collection is done in-house leading to quality portfolio.
GEOGRAPHICAL PRESENCE
Present in 6 states and UTs with further plans to diversify, with 350+ branches and
1.6+ lakh customers leading to substantial repeat business with less effort.
DIVERSIFIED LENDER BASE
Exposure to commercial papers is nil and c.30% of borrowings are term loans; relationship
with 18 banks and 16 financial institutions.
Backed by marquee TPG entering in Oct-18.
investors with[38] Norwest, Baring PE India and Evolvence Coinvest entering in Dec-17.
BanyanTree Growth capital exiting in Dec-17, having invested in the
company in Mar-12, making an INR IRR upwards of 30%.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 27
EXHIBIT 15
Kogta and Ess Kay are following the footsteps of Cholamandalam
CUSTOMER Small fleet operators Middle and lower-middle Low and middle income
and first-time users. class customers from group borrowers.
rural and semi-urban
areas (20% are NTC
customers).
DIVERSIFICATION Well diversified book Diversified book with Diversified book with
into vehicle (focused foray into LAP and foray into LAP and
on LCVs) and home MSME, focus on used MSME, focus on used
finance. CVs under vehicle CVs under vehicle
finance. finance.
GROWTH Higher growth of c. 20% High growth trajectory High growth trajectory
CAGR among peers with with 50% CAGR over with 60% CAGR over
similar vintage. last 5 years. last 4 years.
ASSET QUALITY Maintained asset Maintained GNPA at Maintained GNPA at
quality with current c. 4%. c. 3% over last 4 years.
GNPA at 2.2%.
TECHNOLOGY Stable tech platform In-house ERP-based Purchased and installed
for MIS, Gaadi Bazaar customized proprietary customized advanced
– digital engagement risk management and MIS – Fin one neo,
platform for dealers, reporting software, extensive use of data
hybrid cloud computer Accurate. analytics in operations .
and storage set up.
INVESTOR CONFIDENCE More consistent Marquee equity Marquee equity
vehicle finance stock investors on board with investors on board with
in the market, valued attractive valuation; attractive valuation;
attractively by public relationship with over relationship with over
and experts alike. 30 debt investors. 20 debt investors.^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 28
5.
The future looks bright
At Avendus, we are bullish about the used CV market as the growth driver for the NBFC vehicle financing
sector. As already stated, banks have dominated PVs, while banks and OEMs have captured new CVs, which
leaves the used CV financing space fairly untapped. NBFCs need to establish their hold in this segment,
maintaining a focus on LCVs. Take a look at our estimate of the market size and key players we anticipate
dominating the space as organized finance penetration increases.[39]
EXHIBIT 16
Market size estimates[40]
NBFC CV AUM (INR IN TRILLION) USED LCV AUM (INR IN TRILLION)
c. 3.0 c. 1.2
FY26E
FY26E
c. 1.7 c. 0.6
FY21E
FY21E
c. 40%
Current share of unorganized players in Used CV financing^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 29
Product and geographical diversification, coupled with in-house, advanced tech capabilities to build better
process and underwriting, and the ability to focus on the right product, would be the key ingredients for the
market leaders of tomorrow in the vehicle finance space.
PRODUCT AND
GEOGRAPHICAL
DIVERSIFICATION
KEY INGREDIENTS FOR
ADVANCED IN-HOUSE TECH
CAPABILITIES TO BUILD
Future Leaders in
BETTER PROCESS AND Used Commercial
UNDERWRITING
Vehicle Finance
ABILITY TO FOCUS ON THE RIGHT
PRODUCT (SMALL TICKET, HIGH
YIELD, RETAIL LOANS)
We believe emerging leaders in the used CV space
such as Kogta & Ess Kay can capture 15% of the
used (non-HCV) space in India in the next 5 years^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 30 6. About the authors Anshul Agarwal Abha Agarwal Executive Director & Co-head, Executive Director & Co-head, Consumer, FIG and Business Services Consumer, FIG and Business Services anshul.agarwal@avendus.com abha.agarwal@avendus.com Kushagra Kumar Snigdha Khemka Director, Vice President, Consumer, FIG & Business Services Consumer, FIG & Business services khusagra.kumar@avendus.com snigdha.khemka@avendus.com
^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 31
Glossary
2-W 2-Wheeler LAP Loan Against Property
3-W 3-Wheeler LCV Light Commercial Vehicle
ALM Asset Liability Management LTV Loan to Value
ATS Average Ticket Size MFI Microfinance Institution
AUM Assets Under Management MHCV Medium and Heavy Commercial Vehicle
BS6 / BSVI Bharat Stage Emission Standard MSME Micro, Small and Medium Enterprise
CAGR Compound Annual Growth Rate MUV Multi Utility Vehicle
CE Construction Equipment NBFC Non-Banking Financial Company
CoF Cost of Funds OEM Original Equipment Manufacturer
CV Commercial Vehicle OMC Oil Marketing Companies
DFC Dedicated Freight Corridor P/B Price to Book
EMI Equated Monthly Installment PV Personal Vehicle
ERP Enterprise Resource Planning SCV Small Commercial Vehicle
FMCG Fast Moving Consumer Goods SME Small and Medium Enterprise
FTU First Time User SRTO Small Road Transport Operator
GNPA Gross Non Performing Asset TTM Trailing Twelve Months
GST Goods and Services Tax USD US Dollar
HCV Heavy Commercial Vehicle UT Union Territory
INR Indian Rupee UV Utility Vehicle
VF Vehicle Finance^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 32
Sources
Page 03 Page 10
[1] CapitalIQ [19] GOI Budget 2021 Document
Page 04 Page 11
[2] Elara Capital report [20] https://www.hindustantimes.com/india-news/
[3] Credit Suisse report govt-to-provide-tax-incentives-against-vehicle-
[4] Credit Suisse report - India NBFC Sector Long and scrappage-gadkari-101616057294684.html
Winding Road to Recovery [21] https://www.financialexpress.com/auto/industry/
union-budget-2021-22-new-vehicle-scrappage-
Page 05 policy-indian-auto-industry-reactions/2183960/
[5] Credit Suisse report [22,23] BOBCAPS IC - STFC
[6] Society of Indian Automobile Manufacturers
[7] BOBCAPS Initiating Coverage Report - STFC Page 12
[8] BOBCAPS - IC STFC [24] https://www.financialexpress.com/infrastructure/
railways/indian-railways-dedicated-freight-
Page 06 corridors-to-be-huge-challenger-for-heavy-
[9] News reports - https://economictimes.indiatimes. commercial-vehicles-heres-how/1662503/
com/news/economy/indicators/indias-
gdp-growth-in-q4-fy20-sinks-to-11-year-low/ Page 13
articleshow/76099894.cms [25] Cholamandalam Q4FY19 IP
[10] Society of Indian Automobile Manufacturers
Page 14
Page 07 [26] Cholamandalam Q4FY19 IP
[11,12] Avendus analysis [27] JM Financial - India Used Car Report June 2019
Page 08 Page 15
[13] CapitalIQ [28] Credit Suisse report
[14] “Second wave of COVID-19 will lead to Credit [29] Credit Suisse report, Avendus analysis
Costs Remaining Elevated in FY22 for NBFCs” -
CARE Ratings Page 16
[30] Credit Suisse report
Page 09
[15] BOBCAPS - IC STFC Page 17
[16] BOBCAPS - IC STFC; Systematix - Commercial [31] Company disclosures, CapitalIQ, Avendus
Vehicle Trends and Outlook research and analysis
[17] Society of Indian Automobile Manufacturers
[18] https://timesofindia.indiatimes.com/ Page 18
india/296mt-record-grain-output-likely- [32] Company disclosures, CapitalIQ, Avendus
in-2019-20/articleshow/75771429.cms research and analysis^ | Future Leaders in Used Commercial Vehicle Finance | 2021 | 33
Sources
Page 20 Page 25
[33] Company disclosures [37] Company disclosures
Page 21 Page 26
[34] CapitalIQ [38] Venture Intelligence, VCCEdge
Page 23 Page 28
[35] Company disclosures [39] Avendus analysis
[40] Avendus estimates
Page 24
[36] Venture Intelligence, VCCEdge^ Disclaimer This white paper is being furnished to you by Avendus Capital Private Limited (“ACPL”) for informational purposes only and should not be regarded as an offer or invitation to participate in any securities or other products. This white paper has been provided to its recipient upon the express understanding that the information contained herein, or made available in connection therewith is in nature of general information and is intended for the exclusive use of its recipient and shall at all times be considered as proprietary and/or legally privileged. It shall not, either directly or indirectly, be photocopied, printed, reproduced and/or distributed to any third party in any manner at any time without prior written consent of ACPL. Nothing in this white paper is intended to constitute legal, tax, securities or investment advice, or opinion regarding the appropriateness of any investment, or a solicitation for any product or service. The information herein reflects the latest available information including information sourced from public sources and is subject to change without notice. ACPL does not represent, either express or implied, that any information, including any third- party information, is accurate or complete and it should not be relied upon without proper investigation on the part of the recipients. Neither ACPL nor its affiliates nor any of its or their officers or employees accept any liability whatsoever for any loss arising from any use of this white paper or its contents. The recipient of this white paper should rely on their own investigations and take their own professional advice. The statements contained in this white paper speak only as of the date of this document, and ACPL does not undertake or assume any obligation to update or revise this, whether as a result of new information, future events or otherwise. Investments in securities/equity related instruments are subject to market risk. These risks could be security specific or market specific and arising from industry, political, economic (both domestic and global), etc, factors. Investor/s should carefully read all disclosure notes and product documents before investing and shall not hold ACPL and/or its associates/ employees or officers liable for any risks/losses pertaining to any product/ scheme offered by them from time to time. Past performance does not indicate the future performance. Certain statements made in this white paper may not be based on historical information or facts and may be “Forward Looking Statements”, including those relating to general business plans and strategy, future financial condition and growth prospects, and future developments in industries and competitive and regulatory environments. Although ACPL believes that the expectations reflected in such Forward Looking Statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Actual results may differ materially from any Forward-Looking Statements due to a number of factors, including future and/or unforeseen changes or developments in the business, its competitive environment and political, economic, legal and social conditions in India or other jurisdictions. Given these uncertainties, the recipients are cautioned not to rely on such Forward-Looking Statements and undertake their own due diligence. This is not a research report within the meaning of the Securities and Exchange Board of India (Research Analysts) Regulations 2014 as amended from time to time.
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