2011-12 was a difficult year for the global economy, with GDP growth slowing down from5.3% in 2010 to 3.9% in 2011 in wake of European debt crisis, tightening liquidity andongoing impact of 2008 meltdown. While the developed nations like US and Euro Zonecounties nearly halved in terms of GDP (US from 3.2% in 2010 to 1.7% in 2011; and EuroZone from 1.9% to 1.4% in 2011. With the ongoing crisis in Euro Zone, the GDP growth isanticipated to turn negative to -0.3% during 2012. Economic activity is expected to remainrelatively solid in emerging markets such as India, China and Brazil with GDP growing 5.7%in 2012, down from 6.2% in 2011.The IMF, however, warned that the European debt crisiscould flare up any time and send the global economy into a recession.
India's economic growth is estimated to have slowed to 6.9% in 2011-12 from 8.4% in2010-11 mainly due to high inflation and high cost of finance that impacted bothconsumption and investments. The year was marked by tightening liquidity, higher cost offunds, leading to a negative impact on the infrastructure investments and resulting indeferred investment plans. But inflation has been under control since October last yearand the Reserve Bank of India has eased its tight monetary policy by cutting theshort-term lending rate for the first time in more than two years. Before cutting the rateby 0.50 percentage point in April 2012, the apex bank had increased repo rates by 3.75% inseveral rounds since March 2010 to check rising food and commodity prices. The PrimeMinister's Economic Advisory Council recently predicted 7.5%-8.0% GDP growth in 2012-13although the Asian Development Bank has pegged it at 7%.
| || |
|Segments ||FY08 ||FY09 ||FY10 ||FY11 ||FY12 |
|M&HCVs ||274,582 ||183,495 ||244,944 ||323,059 ||348,701 |
|LCVs ||218,912 ||200,699 ||287,777 ||361,849 ||460,831 |
|Total ||493,494 ||384,194 ||532,721 ||684,908 ||809,532 |
Commercial vehicle sales in India increased 18.2% year-on-year in 2011-12, but sales ofmedium and heavy commercial vehicles (M&HCVs) rose a muted 7.9% as compared to 37.2%in 2010-11. This decline was on account of high interest rates on loans, contractingindustrial production and a spike in vehicle prices.
Moreover, the mining ban imposed in key states such as Karnataka, Odisha and Goa alsoled to significant reduction in demand for commercial vehicles, particularly pre-owned,since the vehicle owners struggled to get consistent revenues.
Several fleet operators put brakes on their expansion plans due to slowing industrialactivity and tough operating environment where freight rates remained stagnant despiteincreasing operating costs.
Light commercial vehicle sales, however, increased 27.4% in 2011-12, driven byincreasing demand from rural areas, emergence of the hub-and-spoke model and the need forlast-mile connectivity.
In a recent report on the commercial vehicle industry, ICRA said that although thenear-term risks against M&HCV demand has increased, the demand over a longer periodremained intact. It projected long-term growth outlook for M&HCV of 9.5-11.5% CAGR andfor LCV of 11-13% CAGR over the next Ave years.
The trucking industry is going through some changes. In the M&HCV segment, theshare of heavy-duty, long-haulage trucks (16T+) is increasing, on account of improvingroad and highway infrastructure as well as increasing availability of such vehicles. Inthe LCV goods segment, share of sub 1T segment is on the rise with the emergence of thehub-and-spoke model and increasing demand for last mile connectivity.
Domestic passenger MHCV sales volume growth is likely to witness flat growth in FY13due to the expiration of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM)scheme in December 2011. Under this scheme, state transport undertakings received fundingfor purchase of buses. The JNNURM scheme had contributed 7% of average annual salesvolumes for passenger MHCVs over FY07-FY11. Meanwhile, domestic cargo MHCV sales volumegrowth is likely to moderate to 7% in FY12 on account of moderation in IIP growth. Thecorrelation between growth in IIP and road freight was as high as 75% over FY07-FY11.Slower growth in IIP is likely to result in lower availability of road freight to freightoperators.
The increase in freight rates on most routes has been relatively lower than theincrease in costs. Vehicle prices have increased by 8% over the past year due to commodityinflation. Running costs have also increased, mainly led by higher fuel prices andinterest costs over the past year.
Fuel cost is the biggest expenditure for a freight operator (50% of revenues) and anyincrease in fuel cost affects margins. A freight operator is able to increase freightprices to recover the increase in fuel cost in absolute terms, but in relative terms hismargins reduce.
The RBI decision to cut lending rates by 0.5% is expected to revive overall businessactivity in the country, which will lead to increased movement of freight and higherdemand for commercial vehicles, both new and old.
Used or pre-owned vehicles account for almost 70% of the total commercial vehicle salesin the country. Small road transport operators, who typically own less than Ave trucks,largely control the freight movement on road. And everyday more people join this expandinggroup of truck entrepreneurs, and mostly their first buy is a used vehicle. On an average,a commercial vehicle is resold three times during its operational lifecycle ofapproximately 12 years. Sales of new commercial sales rebounded sharply since 2004, thanksto a sudden acceleration in economic activity and growth. Many of these vehicles are nowin the used CV market.
Non Banking Finance Companies (NBFCs) have emerged as important financialintermediaries particularly for the small-scale and retail sectors. It is estimated thatthe NBFC industry accounts for 11.2 % of assets of the total financial system in thecountry. With simplified sanction procedures, flexibility and low operating cost, NBFCshave an edge over banks in meeting the credit needs of customers. And they areincreasingly recognised as complementary of banking system at competitive prices.
Commercial vehicle financing is perhaps the oldest retail-financing segment in thecountry. It is a highly fragmented segment because, one, there is a huge number of peoplebuying trucks, and too many of these people have poor banking habits. So unorganised moneylenders meet the financing needs of several buyers of used trucks. The CV financing marketin India is estimated to be more than 100,000 crore with vehicles more than five years oldaccounting for half of it.
Small road transport operators and first time buyers make up the customer base offinanciers of pre-owned commercial vehicles. They are perceived to be highly riskycustomers because of their poor banking habits and tendency to be on the move all thetime, as owner-drivers of trucks. This makes it extremely difficult for financiers totrack their customers and the financed vehicles. Also, because most truck operators getcash payment for their services, they lack a banking culture. For several buyers, theirvehicle is their only asset and only means of livelihood. Clearly, this customer segmentdoes not meet any traditional credit criteria.
Another challenge faced by buyers and financiers of used vehicles is lack ofestablished platforms for trading such vehicles and proper asset valuation norms. Thisharbours a perception of increased risk with the financiers.
On the positive side, yields are much higher than on new vehicle financing and the loantenure is less. Also, there is huge room for penetration as unorganised players dominatethe segment.
India's earthmoving and construction equipment industry is expected to grow six timesto US $22.7 billion by 2020 from total revenues of US $3.3 billion in 2010, mainly drivenby the Union government's national infrastructure projects and the real estate industry.
The 2012-13 Union Budget proposed allocation of Rs. 5,000,000 crore for infrastructureinvestment during the 12th Five-Year Plan (2012-17). The Budget also doubled the tax-freebonds for financing infrastructure projects to Rs. 60,000 crore during 2012-13. It alsoincreased allocation of the Road Transport and Highways Ministry for the financial year by14% to Rs. 25,360 crore.
All this is expected to drive demand for construction equipment such as crawlers,excavators, loaders and compaction equipment, and boost the heavy equipment rental andleasing business, which is currently a highly fragmented industry dominated by unorganisedsmall construction equipment operators. These customers, whose profile is very similar tosmall road transport operators, have improved demand for second-hand constructionequipment in recent years.
While the business is at a nascent stage, the potential is enormous going by thecountry's huge infrastructure gap that needs to be bridged to keep up the economic growthrate.
ABOUT THE COMPANY
Established in 1979, Shriram Transport Finance Co Ltd. is the largest asset financingNBFC with assets under management of Rs. 40,213.90 crore. The company is a leader inorganised financing of pre-owned trucks with strategic presence in 5-12 year old trucksand a market share of around 25%. It has a pan-India presence with a network of 502branches along with ~500 private financiers, and has built a strong customer base of over8.5 lacs.
2011-12 IN REVIEW
The year 2011-12 was a tough year. The after-effects of 2008 crisis was still visiblein the global as well as Indian economic performance. To tame inflation, the interestrates were revised on more than thirteen times between March 2010 and January 2012,resulting in dearer financial resources for the borrowers. The liquidity was tightenedthat also resulted in lower consumption and deferment of expansion plans/ infrastructurespends on both the corporate and government levels. At the same time, key events such asban on mining in Odisha, Karnataka and Goa also contributed to a difficult environment.However, at STFC, we used this lean period to consolidate our operations, focus on keyopportunities and emerge stronger than ever. As a result, while our Net interest incomeincreased by 10.95% to Rs. 3,226.14 crore; our net profits stood at Rs. 1,257.45 crore. Wesurpassed Rs. 40,000.00 crore mark in terms of Assets under management and opened 14 newbranches during 2011-12.
1. Continued our penetration to rural centres
Having established a scalable business model in terms of organisation structure, theyear 2011-12 witnessed our foray into deeper regions, mainly rural areas of India. Webelieve that the Indian growth story is closely woven with the aspirations, growth andprosperity of rural India. As a result, during 2011-12 we opened 14 new branches with afocus to increase our customer base. Having created 502 branches across India, it gave usa perfect opportunity to replicate our business model at deeper regions at lowerincremental cost and without compromising with the asset quality. These centres resultedin lower capex as well as commanded lower operation expenses. However, these centresenabled us to remain consistently in touch with our customers and provided us an edge overbanks and other competitors.
At the same time, we continued to offer new products and services to leverage ourexisting infrastructure in line with the growth ambitions of our clients.
2. Using technology as key differentiator
At STFC, we believe that technology not only helps in tracking and protecting our assetquality, but also allows us to reach to newer customers with convenience and betterservice. To ensure better service, we invested in replicating access of key information onmobile platforms for our customers as well as field officers and branches. This leads toconsiderable reduction in turn around time between transactions, provides real-time accessto required information and also ensures highest standards of transparency in thecustomer-company relationship. We have been able to leverage our well-establishedtechnology systems to maintain trust and transparency with our clients.
3. Focused on asset quality
With the depletion in economic conditions, we continued to critically scrutinize eachasset class and ensured lower delinquencies. With the economic uncertainties profound, wechose to grow responsibly rather than grow rapidly. As a result, we reduced Loan-to-value(LTV) ratio by 5% to mitigate any doubts in earning capacity. This led to reduced businessbut proved a huge fillip for our asset quality. We also passed over the increased interestrates to our customers to protect our margins amidst uncertainty.
CONSTRUCTION EQUIPMENT BUSINESS
Being a preferred financier to more than 8.5 lacs customers across India, we at STFCdecided to align our product portfolio with the evolution of our clients. We witnessed atrend among small road transport operators to diversify into construction equipment, owingto impending infrastructure investments in India. To capitalize upon the opportunity andmoreover to continue nurturing our existing relationships, we floated a subsidiary -Shriram Equipment Finance Company Ltd., in 2010, comprising of independent team ofprofessionals, having intensive product expertise. Through Shriram Equipment Finance, weoffer a wide range of pre-owned and new commercial construction equipment includingforklifts, cranes, loaders etc. During 2011-12, Shriram Equipment Finance Company Ltd.registered a topline of Rs. 210.11 crore and a net profit of Rs. 51.62 crore. The companyhad an AUM of Rs. 1,923.37 crore as on March 31, 2012.
During its second year of operations, Shriram Automall India Limited, the subsidiaryoperates eight Automalls. Automall is the first-of-its-kind mall that offers a commonmeeting platform for the potential buyers and sellers where the valuation of the vehicleis determined through a transparent public auction process. Till date, more than 1,200auctions have been conducted and more than 45,000 vehicles have changed hands with over35,000 bidders. The value proposition of each Automall is absolute transparency invaluation process, backed with assured title, quality and performance of the vehicle. TheAutomalls would hold periodic auctions of pre-owned CVs that have been repossessed byShriram Transport and other financing companies. While the company would earn a fee-basedincome from each vehicle auctioned, it will also gain access to a ready consumer base forvehicle financing. Above all, the initiative would enable the company to institutionalizethe valuation practices and create a valuation benchmark for pre-owned commercialvehicles.
Shriram New Look is a novel initiatives taken by STFC, that aims at empowering vehicleowners to transact refurbished vehicles by addressing and correcting few maintenanceissues. This facility is available in the Automalls but is managed by a dedicated team.
The pioneer in the pre-owned commercial vehicles financing sector
Knowledge-driven and relationship-based business model
Pan-India presence with 502 branch offices
A well-defined and scalable organisation structure based on product, territoryand process knowledge
Strong financial track record driven by fast growth in AUM with low NonPerforming Assets (NPAs)
Experienced and stable management team
Strong relationships with public, private as well as foreign banks, institutionsand investors.
More than 8.5 lacs customers across India
The Company's business and its growth are directly linked to the GDP growth ofthe country
Growth in the CV market
Strong demand for construction equipment
Strong demand for passenger CVs
Strong demand for pre-owned tractors
Loans for working capital requirements of CV users
Partnerships with private financiers will enable the Company to enhance itsreach without significant investments in building infrastructure
Regulatory changes in the NBFC and ancillary sectors
During the year 2011-12, the Company's total income increased by 9.12% to Rs. 5,893.88crore, as compared to Rs. 5,401.05 crore in 2010-11. The Company's net profits stood atRs. 1,257.45 crore in 2011-12, from Rs. 1,229.88 crore in 2010-11. The Gross NPAs and netNPAs for the year under review stood at 3.06% and 0.44% respectively. The Company's netspread for the year under review stood at 5.61%. The company's net interest incomeincreased by 10.95% to Rs. 3,226.14 crore in 2011-12.
Capital Adequacy Ratio (CAR)
The Company maintained a CAR of 22.26% during 2011-12 against a minimum 15% as requiredby RBI norms.
The Company's total external borrowings increased from Rs. 19,881.71 crore as of March31, 2011 to Rs. 23,127.36 crore as of March 31, 2012.
ASSETS UNDER MANAGEMENT (AUM)
The total Assets Under Management (AUM) as on March 31, 2012 stood at Rs. 40,213.90crore against Rs. 36,182.63 crore as on March 31, 2011.
During 2011-12 the company securitised its assets worth Rs. 8,346.13 crore (about20.75% of the total assets under management as on March 31, 2012) as against Rs. 10,203.61crore during 2010-11. The securitisation allows the company to mitigate the interest riskby converting its floating liability to fixed price liability but also enables the companyto access funds at competative cost under priority sector lending. The outstandingsecuritised assets portfolio stood at Rs. 18,226.14 crore as on March 31, 2012.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
In any industry, the processes and internal control systems play a critical role in thehealth of the Company. The Company's well-defined organisational structure, documentedpolicy guidelines, defined authority matrix and internal controls ensure efficiency ofoperations, compliance with internal policies and applicable laws and regulations as wellas protection of resources. Moreover, the Company continuously upgrades these systems inline with the best available practices. The internal control system is supplemented byextensive internal audits, regular reviews by management and standard policies andguidelines to ensure reliability of financial and all other records to prepare financialstatements and other data. The Audit Committee of the Board reviews internal audit reportsgiven along with management comments. The Audit Committee also monitors the implementedsuggestions.
As of March 31, 2012, the Company had 15,057 employees on its payrolls including 8,155product/credit executives.
KEY RISKS AND MITIGATION MEASURES ECONOMY RISK
Commercial vehicle sales in India have a close relation to the performance of theeconomy and industrial activity. With the economy undergoing a slowdown, the sales may beadversely impacted in the coming years, thereby hurting company's growth prospects.
Pre-owned commercial vehicles are largely driven by aspirations of a unique customersegment - first time users
or driver-turned-owners. This aided by the lower deal size results in a potentcombination that has largely eluded economic downturns. The company is the market leaderin lending to this segment and therefore remains largely mitigated by economic downturns.
HUMAN RESOURCE RISK
Since the company's business is based on long-standing relationships and productknowledge, any attrition of key resource may result in loss of business.
The company employs more than 15,000 people and has a track record of maintaininghighest levels of professionalism, transparency and a unique entrepreneurial culture.Being a professionally managed organization, promising talent is recognized, nurtured,valued and promoted across all divisions to ensure organizational growth is tied up withthe individual's growth.
ASSET-LIABILITY MISMATCH RISK
If the funds acquired as short term borrowings are employed in creation of long-termasset, then the company may face severe imbalance in the funds position, resulting ininability to service short term liabilities and overheads.
The company has progressively derisked itself from the asset-liability mismatch byincreasingly resorting to long-term sources of funds like equity and debt. The company'stimely initiatives past year to raise NCDs coupled with securitization protected it to alarge extent in wake of northbound interest rates during 2011-12.
INTEREST RATE RISK
In an inflationary environment, the risk of contraction in net interest margins canresult in direct impact on company's performance.
The company's comprehensive knowledge of asset valuation enables it to lend resourcesjudiciously. Owing to highest standards of transparency and robust fiscal management, theCompany also enjoys high credit ratings for its long-term as well as short-term creditrequirements. In addition, to mitigate the over-reliance on the borrowed funds, thecompany has actively initiated securitization process, thereby unlocking low cost funds tofuel its growth.