Shriram Transport Finance Company Limited (STFC), which completes 30 years of its existence in 2009, has created a niche for itself in the business of financing pre-owned commercial vehicles (CV), mainly trucks.
Over the years, STFC has established a strong brand equity and relationship with its over six lakh customers, emerging as India’s largest asset-based NBFC (total assets at over Rs 20,000 crore) with 450 branches spanning a geography that covers 92 per cent of truck owners.
In an interview with Vishal Chhabria, the company’s managing director, R Sridhar talks on various aspects of the CV industry, its current state, the company’s prospects and its growth strategy among other things. Excerpts:
Given the deterioration at the macro front, what is the feedback you are getting from the customers?
When economic growth gets affected, the CV industry fortunes get affected due to the demand-supply mismatch in freight carrying capacity. But when it comes to viability of operating trucks, it is still not affected. It is quite ok. The interest rate is not affecting the quality of assets because the NBFCs and the banks, which are lending money to the truckers, are at fixed rates.
So, the truckers cost (rate) is not going up. The operational economy of the trucker gets affected by various factors, mainly fuel which is 2/3rds, insurance, other maintenance, repair of tyres, etc.
All these things including interest costs add up to his profit or loss. Higher fuel costs have been partly offset by higher freight rates. So, the truckers’ profit is not affected to a great extent.
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So, you haven’t seen any kind of slowdown in the pre-owned CV business?
No. Since in the old vehicle finance business, there is no addition to the capacity it is just a change of owners. But when a new truck is sold, a new capacity is added, which has a bearing on the freight rates. So, as far as the viability is okay, people do buy and sell.
Has the new CV financing business seen a slow down?
It has, but the advantage is that the banks which were dominating in the new vehicles financing have pulled off, which is the case with two-wheelers also. With some banks going out of CV financing, it has mostly come back to the NBFCs.
When do you see the demand revival happening for the CV industry?
That is only a prediction. Optimistically, it will be in next 6 months. Pessimistically, it will take another 2 years. What happens is that it is a cycle and the demand has to return at some time. But unfortunately, the GDP forecast which we have been doing beyond 8%, is expected at 7-7.5%.
Have you seen any increase in NPAs?
Our credit quality is holding out, which means that these people are not pressured. And inflation is kind of good for finance companies because the interest rates are more, so the yield is better for truckers.
And also, the value of their assets, of the old vehicles, because of the inflation, it keeps moving up.
What is your USP or key entry barrier for competition?
There are many entry barriers. One, it is the relationship with customers. What the banks do and the NBFCs do, is different. But particularly the business which Shriram is doing is totally based on relationships.
Throughout if you look at their (banks) method of selling retail loans, it is through DMAs and DSAs. They don’t develop any relations. Banks have traditionally been on the liability side (ability to raise money). But when it comes to assets, they have always used the intermediately route.
So, the biggest barrier is, understanding of the customer. Without that, this business cannot be done. My customer is not going to give any documents because he doesn’t pay income tax, doesn’t have banking habits and doesn’t have collaterals.
Most of the trucks are driven by owners. The collection is very challenging. So, unless you have a relationship, you understand and you go to him every month and collect, you will be under pressure. So, it is not going to be easy.
Why were margins down during Q1?
Operationally, we don’t have any problem. But what happens is, because of the liquidity crunch, what people talk about, we carry more cash. Going forward, NIMs should be in the range of 8 per cent. There will be some insignificant reduction due to the high cash.
Can you throw light on the company’s diversification into other areas?
We have always been a truck financing company. We have broad based that. We are calling ourselves commercial vehicle finance firm. So, we are financing all vehicles which are plying on the road, used for commercial purpose. First, it was only trucks. Now, we are funding 3 wheelers, tractors, passenger CVs like buses, rickshaws, other things like construction equipment.
What is the thought process of getting into these segments?
De-risking is one reason. The second is that you have to keep growing. We are not going out of commercial vehicles. We are in the same vehicles segment only, but in different types of vehicles. For small operators, we have found that there is nobody to fund, so we are funding.
Once your credibility in the market place improves and there are banks and institutions which are ready to lend to you, then you are able to raise money. Firstly, you must have strength on the asset side. Then, you get strength on the liability side also. We have strength on both these sides.
So, when the money inflows into the company, then you have to make innovations on the assets side. That is where we are. If you are obsessed with asset quality only, then you face this problem then people don’t grow. But we are slightly aggressive, in terms of business. So, we have used those opportunities and expanded.
Are the rules different in these new verticals? And, how are the margins?
Absolutely no change. Without that NIM, we won’t enter any business. Whether it is tractor or something else, it is the small operator only whom we are funding; a particular segment which has been denied credit. What we have found is that these truckers and small operators, they borrow money for buying vehicle and after that, they move to another financier.
They have different financiers who provide different credit to them; discounting credit, tyre loan, credit card, etc. So, what we have done is that we have provided everything in one company, so the truckers don’t go anywhere and come to us as we have all the products. That is the success. That is why, we are growing. Without innovation, we are out.
Within pre-owned CVs, how do you see the share of these new verticals moving in the next 3 years?
It is 10 per cent. We would like it to go to 15-20 per cent. But, trucks would be the main.
Within the CV segment, what would be the ratio of the new and pre-owned?
That is 25-75 per cent, going up to 30-70 per cent maximum. We are only funding our own old fellows, upgrading to new trucks. At some point of time, he upgrades. That time, we don’t tell him you go somewhere else. We provide the cost.
What is the company’s growth projection for next two years in terms of asset size and revenues?
We are confident of growing our own 30 per cent. It could be more. We closed at around Rs 25,000 crore, so we should be around Rs 30,000 crore. Our disbursement was around Rs 11,000 crore, which should be around Rs 15,000 crore.