The first quatter of FY15 (April-may-June) is likely to be weak for commercial vehicles business, says Vellayan Subbiah, managing director, Cholamandalam Investment & Finance.
Speaking to CNBC-TV18, Subbiah and Rupali Shankar, director, Crisil Ratings, share their views on the CV business and the road ahead.
Also read: Tata Motors to invest Rs 1,500 cr on new trucks, buses
Shankar says the past 18 months have been very stressful for companies as ehicle utilization was at a decade low and a sharp increase in NBFC delinquencies was seen.
"I expect a lowering in policy bottlenecks her on. As manufacturing sector utilization comes backs, slow stabilization will be seen in the transport operating sector," adds Shankar.
But she quickly adds that this revival won't be inline with the spurt seen in 2011.
Subbiah agrees that there will be a revival, but it will only be seen in July 2014 as Q1 of every year is a seasonally weak quarter.
"It is not that everyone is eyeing the election outcome. It is just that theu have stopped any sort of economic activity until the results are declared," highlights Subbiah.
Below is the verbatim transcript of the interview.
Sonia: If you could just give us the key highlights of your report what makes you believe that perhaps the worst is over for the CV sector?
Shankar: We have released a report which covers the entire transport operators' value chain. So, we looked at about 100 odd transport operators that we rate. Today, about all the non-banking financial companies (NBFCs) that finance against commercial vehicle loans and also we looked at about 90 securitization transactions covering about Rs 21,000 crore of CV loans, what we have seen is the past 18 months have been a period of stress for transport operators. If you look at vehicle utilisation and freight availability, it has been at a decadal low. We are expecting a moderate recovery in 2014-2015 but back-ended towards the second half of the year. Primarily because what we are looking at is the lowering of policy bottlenecks over a period of time slowly and manufacturing sector capacity utilizations to start improving, which would result in little growth in freight availability while it will not go back to 2011-2012 levels, we are going to see a moderate recovery.
Now coming to CV financers, what we have seen is a very sharp increase in delinquencies, almost 1.7 times between March 2013 and March 2014. So if you look at gross non-performing assets (NPAs), those levels have increased to about 4.6 percent as of March 2014 and consequently the profitability of this CV financers, which is non-banking financial companies (NBFCs) have been impacted. So return on managed assets has fallen by about 40 bps to roughly 1.8 percent.
Now, looking at 2014-2015 what we are saying is as the manufacturing sector capacity utilisation comes back and you see a moderate increase in index of industrial production (IIP) or also a lowering of policy bottlenecks in many key sectors, what you will see is a slow stabilization in both the transport operator sector as well as in the CV financers. So it is going to be a year of slow recovery.
Latha: What is the experience you have on the ground, are you seeing any bottoming out of the stress that your borrowers have been facing, do you see it in the securitization deals, any evidence that non-performing loans (NPL) stresses lower?
Subbiah: I would say the only thing that we are seeing is that we are seeing the flattening out in terms of behaviour in terms of performance of the loans but that is not showing any signs of improvement. So I would say, it is flattening out at levels that were far worse than they were last year and since April 2013 for every month it has gotten worse. So basically we are not seeing any improvement at this stage but we are seeing flattening out for the last couple of months but it is still too early to tell whether that flattening out is going to sustain or whether it is going to get worse again.
Sonia: So if you are seeing only flattening out at this point, when do you expect to see improvement, will it take place in the first half of FY15 or do you think it could take some more time because as Rupali Shankar was also pointing out, we are seeing improvement in the mining activity which forms a big chunk of some of these south Indian based players like Ashok Leyland etc?
Subbiah: I would say, it is tough to predict exactly when the recovery will come back. If I were to look at it part of what is happening right now is that everybody has stopped economic activity until the elections, everybody wants to see what is going to come out of the elections and I would say that whatever is the outcome of the elections, everybody is expecting a pick-up post elections and that is not because of the elections as an event, it is just because people have stopped doing anything and try and wait to see what the elections is going to produce. So post elections we will see some recovery especially on the economic activity side. The mining activity is more driven by policy so we have to see where that comes out.
Latha: Your note still speaks about 30-40 percent excess capacity in the CV market, how will that impact, will that mean that because of this excess capacity, freight rates will not go up anytime soon? What we will see is only a little bit of volume growth?
Shankar: Currently utilisation levels amongst transport operators if I were to look at our portfolio of 100 transport operators is roughly at about 60-65 percent overall. Clearly, what we are going to see first as the manufacturing sector capacity utilisation improves overall and IIP growth improves is slowly this capacity utilisation will start to increase and it is only when transporters are using their current fleet of vehicles to a larger extent and they are able to find freight that is when they will think of the next step, which is fleet additions, which we believe is a little bit far out into the future, maybe fag-end of FY15, maybe FY16. So clearly what we are seeing is that capacity utilisation will improve first.
Latha: If I got your reply right, you are still talking about whether there will be a rise not so much as when there will be an improvement?
Subbiah: We have to be optimistic about this because there will be a rise.
Latha: So you do see a bottoming out in the second half of 2014 calendar?
Subbiah: It is tougher to predict when the bottoming out will happen. I will definitely say we are closer to bottom right now. Usually April-May-June is traditionally a weak market for trucks. So we definitely see that April-May-June is going to continue to be weak. So if there is going to be a pick up, it is likely to start in the July-August timeframe that is our best estimate as to when the pick up will start. But whether there are any indicators that are pointing to that pick up starting, I would say the biggest driver is the fact that people are just waiting right now. what we are seeing is large manufacturers are delaying their payment to truckers and what is unfortunate is large manufacturers are doing it, they manage their working capital cycle more effectively but what is happening as a macro effect of that is that the truckers who can least take that economic hit of delayed payments are basically getting the economic hit. As a result, you see more defaults and that is creating a huge whiplash in terms of the effect on the economy itself.
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