The agency has revised the outlook on commercial vehicle (CV) loans to stable for FY17 from stable-to-negative for FY16. The agency believes that improved industrial activity resulting in improved freight demand will help mitigate the overcapacity built in the commercial vehicle (CV) industry due to lacklustre industrial growth over the last few years. However, a significant increase in freight rate is unlikely owing to the low entry barriers in this industry. The current level of improved margin, mainly on account of over 14% reduction in average diesel price over the 12 months ended November 2015, would also aid the CV operators' debt serviceability. The improved freight demand is likely to provide more benefit to the owner of new vehicles than to that of used vehicles primarily due to the high load carrying capacity of new vehicles.
The delinquency levels for both light and heavy CV loans originated before 2014 are likely to taper down in the next 12 months. The worst performing 2013 vintage loans might witness the most significant correction with weighted average delinquency of 2013 vintage LCV and HCV loans coming down to nearly 4.5% and 4.0% of initial disbursed loan amounts, respectively, from the current value of nearly 7.5% and 6.0% in the next 12 months. Also, the peak delinquencies in 2014 and 2015 vintage loans are likely to remain within the peaks observed for 2013 vintage loans, signalling the recovery underway in the sector. With a recovery in industrial output, the agency expects new CV loans to again outperform old CV loans - a trend seen from 2006-2010 but which got reversed between 2011-2015 driven by lower utilisation levels and higher debt service. This exposed new CV loans to higher delinquencies than used CV loans.
The agency has revised the outlook on tractor loans to negative for FY17 from stable-to-negative for FY16. The poor monsoons in 2014 and 2015 and slower growth in minimum support price over the last two years will continue to weigh on the performance of tractor loans. Compared to 3.10% of the average peak 180+ days past due (dpd) delinquency observed in 2011 vintage loans, post 2011 vintage loans reached over 4.00% of average 180+ dpd delinquency in just two years from issuance. The agency's projection of delinquencies in tractor loans of recent vintages indicates that the delinquencies will stay close to the worst levels seen recently.
The agency has also initiated coverage on CMBS backed by commercial offices and retail malls and assigned a stable outlook for both the asset classes for FY17. NCR, Bengaluru and Pune will continue to drive office space demand in the country, primarily on account of the demand from IT/ITeS companies. These three cities alone supplied nearly 78% of the new grade A office space and contributed nearly 67% to the total net absorption in the first three quarters of 2015. Mumbai will continue to witness a stable grade A office space rental market on account of demand from a more diversified sectoral mix with major contribution from pharmaceuticals, BFSI and IT/ITeS sectors. While the performance of retail malls in most of the micro markets in NCR and Pune is likely to deteriorate due to oversupply, mall performance in all other micro markets in the top seven cities are likely to remain stable in FY17.
Economic growth at levels much lower than Ind-Ra's expectation could impact the outlook of all the asset classes negatively. A significant drop in the industrial growth rate as measured by gross value added below 7.6% along with a sharp increase in CV sales resulting in overcapacity, and a sharp rise in fuel prices leading to margin erosion of CV owners could lead to the revision in the CV loan asset class outlook to negative. A significant boost to minimum support price and an increase in agriculture output resulting in a reduction in the delinquencies in tractor loans will lead to the revision of the tractor loan outlook to stable.
High unemployment rate could impact the discretionary spending of the urban households and thus the performance of retail malls across all cities, leading the agency to revise the outlook for the leased retail asset to negative from stable. Any significant contraction in the business of IT/ITeS companies may result in high vacancy levels and thus may translate into a negative outlook for the grade A office space.
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