Most used equipment buyers have uncertain cash flows

Magma Fincorp Limited is a leading NBFC that provides a bouquet of financial products including Commercial vehicle finance, Construction equipment finance, Car and utility vehicle finance, Suvidha loans (refinance), Strategic construction equipment finance, Tractor finance, SME loans, Loan against Gold and Housing finance to individual and corporate customers.

Sachin Khandelwal, Chief Sales Officer, Magma Fincorp Ltd told Sandeep Menezes that the M&HCV segment is positive because it’s not grown for nearly 40 months now – now after 40 months it has to bounce back.
Excerpts from the interview:

Sachin Khandelwal

Sachin Khandelwal

How do you foresee interest rates moving in the months ahead?
I think currently there is too much pressure but the biggest stabilizing fact in the economy is that the oil imports are balancing itself out which is fabulous news. The long term view on the barrel is also really positive. The OPEC producers are also not keen to cut down on production therefore the current production is more than adequate. The drop in retail bank lending has to also be kept in mind.

Last year the construction equipment, commercial vehicle financing segment witnessed degrowth due to tough market conditions. Going forward, how do you foresee the scenario?
We should even split CV into two categories – the small & light segment, and medium and heavy segment on the other side.

While CE segment depends on largely huge projects getting cleared. The replacement buying of smaller players have started. But the overall growth in the CE segment will take some time to happen maybe around six to nine months.

Therefore out of the three segments:

-The CE segment will be stable.

-The M&HCV segment is positive because it’s not grown for nearly 40 months now. Now after 40 months it has to bounce back. It is now unviable for the owner to continue with a three or four year old truck.

-The LCV segment will witness stress and maybe witness negative growth of around 10 per cent.
Used construction equipment, commercial vehicle financing has been a challenging area for many financiers with none getting it perfect. Comment.
Look at the number of equipments available in two districts. These equipments don’t travel large distances and therefore are deployed within that vicinity. Therefore once large projects were started in an area it created excess demand for equipments.
Later a new machine buyer will sell the equipment to a second hand buyer. A second hand buyer is one who deploys on small and sub-contracts at local level. These machines are deployed for short duration type work therefore creating uncertainty of cash flows.
Therefore no assets are missing or fraudulent documents involved. Manufacturers have supported financers and financers have pushed manufacturers. Therefore there are no challenges due to process lapses. Customers are there and assets are there but the viability and of these type customers’ cash flows are just not there. Therefore the financer is reluctant to take exposure in used equipment financing.
Also as equipments get older they are more expensive to operate therefore EMIs get tougher while the customer’s cashflow is uncertain due to his short duration deployments.

Magma Fincorp recently reported a 13% year-on-year increase in loan book to Rs 18,836 crore. Tell us about the contribution of construction equipment and commercial vehicle segments? Going forward, how do you foresee the scenario?
The growth that you mentioned has largely come from three products. In housing, we have started booking a lot of business. Last year, the housing segment was low while this year it is much better.
We have also increased our marketshare in the tractors segment. In fact we are growing by around 20 per cent.
We have also grown in the used vehicle financing segment by around 18 to 20 per cent.
LCV and CVC both put together is around 15 per cent of our book.

Do you foresee changes in this portfolio?
The industry is seeing negative growth in LCV segment. A little higher growth in M&HCV segment – but it will initially grow in large fleet operators wherein we may not have much growth. In the CE segment, we definitely see ourselves growing through CV will be flat and LCV & HCV we will be negative this year.

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