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Dolat Capital Report
Investment thesis
The commercial vehicle financing market in India is sub-divided into multiple segments with each commanding niche expertise. This is evident in market leaders focusing on their target segment for profitable growth. Notably target segment of banks is the upper end of the credit curve – med to large size fleet operators having a higher mix of new vehicles in the overall fleet. This compares with non-banking financial companies focusing at the mid-low end of the pyramid - single truck owners running a fair mix of used vehicles.
India auto industry posted one of its best year with domestic sales volume (wholesale) up 34% / 27% / 18% / 12% YoY for CV /passenger vehicle / two-wheeler /tractors respectively. Retail auto sales also increased 9-43% YoY in FY23. This strong underlying momentum is well captured in the disbursement trends of auto financiers – top four listed auto NBFCs cumulatively clocking 76% YoY increase in disbursements. While the structural growth levers (low vehicle penetration, favorable demographics, consumption led economy) positions the auto financiers on a strong footing.
Shriram Finance - Playing the bottom of the food chain in a top class way; initiate with a ‘Buy' and top pick
Shriram Finance Ltd. is India's largest retail finance NBFC with an assets under management of Rs 1.9 trillion. Shriram Finance has demonstrated its moat in used medium and heavy commerical vehicle financing; enabling it to take the top spot by a significant margin in overall CV financing market. Notably the organised CV financing market share of Shriram Finance is estimated at ~26% (book basis).
We view Shriram Finance's positioning in its core segment remains strong in the medium to long term on account of-
anecdotally used M&HCV financing is a tough nut to crack; limiting competition and
unorganised players (money lenders) accounting for a sizeable share (more than 50%) in pre-owned M&HCV financing.
Shriram Finance's access to low cost funding offers levers to selective profitable growth and sustaining net interest margins.
Mahindra Finance - Fully armed for printing industry leading profitability. New growth underwriting quality is key for rerating.
Mahindra and Mahindra Financial Services Ltd. is a leading auto financier and part of the established global conglomerate (Mahindra group) ecosystem.
Aided by the parent original equipment manufacturer arm top spot in tractors, Mahindra Finance enjoys leadership in tractor financing. Tractor financing market share (disbursement level) is consistently tracking ~15% while CV financing share (basis top four NBFCs) stands at ~6%.
Cholamandalam Investment - A pricey bet
Cholamandalam Investment and Finance Ltd. is the market leader in the used light commercial vehicle financing and consistently commanding more than 10% market share in the overall LCV finance market.
Key investment positive – through cycle winner demonstrating stable asset quality delivery (credit cost averaging ~1% over 10yrs) along with superior growth (10 year pre-provision operating profit /profit after tax / net-worth compound annual growth rate of 23% / 24% / 22% respectively) and profitability (10 year return on equity averaging 18%). This is aided by the lender proven ability of -
calling the CV cycle early (heavy commercial vehicle mix in overall vehicle finance AUM increasing to 19%; up 700 basis points between FY14-FY18), thus, capturing good quality portfolio at respectable yields and
profitably scaling-up higher yielding sub segments in the vehicle finance (two-wheeler, three-wheeler, preowned cumulative share in VF AUM increasing to 37% in FY23 versus 32% in FY17).
Key investment negatives include -
risk of growth and margin tapering off in its core vehicle segment – LCV on account of high base and increased competition from banks given proven track record of low credit losses in the segment,
aggressive foray into riskier / high yielding new businesses (non vehicle) – account for more than 20% of disbursements and 9% of the group AUM as of FY23 and
relatively weak embedded operating leverage with cost-income ratio averaging 35% (10 year) and ~10% gap to peers.
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