Sundaram Finance prefers to be circumspect even as truck sales soar

The commercial vehicle industry has never had it so good in recent times with all segments, right from pick-ups to heavy duty trucks, firing on all cylinders.

No wonder then that manufacturers are making the most of the boom. After all, they went through trying times in the not-so-distant past and the revival is more than welcome.

As Managing Director of Sundaram Finance (which is the flagship of the TS Santhanam arm of the TVS Group), TT Srinivasaraghavan is pleased with the state of affairs given that his company is one of the big financiers for CV-makers. “Demand is robust and there is every reason to believe that there will continue to be good growth in the CV space,” he says.

A combination of factors have come together to drive demand beginning with the infrastructure story that has been “very real” with visible action on the ground”. The tippers segment has seen strong growth while the demand for construction equipment has been “very significant”.

Yet, Srinivasaraghavan would rather take one thing at a time instead of getting carried away with all the euphoria. From his point of view, there are a “few unanswered questions” which need serious introspection.

Questions posed

One, with the doing away of check posts (following the implementation of GST), vehicle efficiency and productivity have gone up by at least 20 per cent. “This should logically impact off-take of new vehicles, as the existing asset has become a lot more productive. But it has not,” points out Srinivasaraghavan. On top of this, he continues, there has also been an actual increase in the number of trucks sold. The third point is that trucks have become bigger. “If you add up all these, one has to ask if this growth is sustainable or is this moving into the excessive capacity zone once again,” says Srinivasaraghavan.

Truck sales are expected to peak before the BS VI deadline kicks in

Clearly, this is food for thought especially when everyone is uncorking the champagne and welcoming the good times all over again. And it is now a near certainty that the following fiscal (2019-20) will be even better since there will be brisk buying ahead of Bharat Stage VI emission norms, which become a reality in April 2020.

After all trucks will become more expensive with added technology fitments and operators would rather buy the present BS IV range and save on a lot of money. Truck-makers will have reasons to feel upbeat since demand will shoot through the roof.

Advising caution

According to the Sundaram Finance chief, there is a tendency to get carried away “with the kind of growth that we are currently seeing” and this is where he would advocate some caution. “This is a cyclical industry and one has to ask as to how long this upturn will continue. Every up is followed by a down and one has to understand the implications of that,” he says.

For now, there is no immediate cause for concern with the good times likely to continue at least till BS VI norms become mandatory. There are also some significant changes taking place within the tonnage space with vehicles now bigger and heavier thanks to roads getting better.

“What this means is that this will displace some of the smaller vehicles. Larger operators may replace medium and smaller operators. We have to see how this plays out. This is mostly in terms of the interstate,” observes Srinivasaraghavan.

The medium segment, which used to be the backbone of the trucking industry, has also been impacted and “moved down” to intermediate commercial vehicles (ICVs), which are in the 8-15 tonne range. “Those who get shunted out of the heavy vehicles space could logically drift into the ICV space,” he says.

Yet, while tonnage could see growth, it is unlikely that the units produced (of heavy vehicles) will grow at a galloping rate over the next ten years. As Srinivasaraghavan points out, the heavy vehicle market will become a fleet operator, logistics and corporate-dominated segment.

“The rest of the market will be served by the traditional owner-driver and small operators segment. In a sense, there will be a polarisation,” he predicts.

The GST aftermath

“Companies like Sundaram Finance did not quite expect GST to be such a game-changer. “We were prepared for a surge because of e-commerce, but GST was a surprise. We had not factored that in. That has made all the difference,” says its MD. With GST, the much talked about hub and spoke model has finally become a reality.”

“There has been a big growth in warehousing. For these short hauls to bring goods to the warehouse and to take goods from the warehouse, I think ICVs and light commercial vehicles fit in perfectly,” says Srinivasaraghavan.

According to him, the lending landscape will mirror ownership. If big trucks become fleet and corporate-driven, it is likely that lenders will be far more price-conscious with higher exposures. In such a scenario, the heavy commercial vehicle market will become a play for banks and large NBFCs while the average NBFC will “slowly get pushed out” into the LCV space.

In the case of Sundaram Finance, the fleet business accounts for only 20-25 per cent of its overall book. “We are still the financier of the small and medium operator and this will continue,” says Srinivasaraghavan.

As he explains, the company is not excessively dependent on any one segment of the market as it is fairly/widely distributed. Of course, some adjustments will need to be made in terms of which segments to focus on either more or less. “I believe that we are reasonably well-positioned,” maintains Srinivasaraghavan.

Sundaram Finance has been focussing on the LCV, construction equipment and tractor segments for a few years now as it sees them as the market of the future. “We have gone through two-three cycles where we learnt a lot about each of these product segments, the market segments and the risks involved,” he says.

To that extent, there has been a lot of testing and research with the company now confident enough to “go a little more broad-based into each of these segments”. LCVs, tractors and construction equipment currently contribute to 15-18 per cent of the book and growing, which means they will remain “more of a focus area” for Sundaram Finance.

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