Published on 31/03/2021 9:51:58 AM | Source: Emkay Global Financial Services Ltd

NBFC Sector Update By Emkay Global

Posted in Broking Firm Views - Sector Report| #NBFC #Emkay Global Financial Services Ltd. #Sector Report

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Used vehicle demand: pick-up visible amid fear of fresh lockdowns

We recently visited a few used vehicle auctioneers in Mumbai and Thane region to understand current market dynamics and the demand-supply scenario.

* Overall revival in demand visible but fresh round of lockdown an issue: Most auctioneers are witnessing a normalization in activities with an improvement in demand for used vehicles after Diwali. Since last year, these auctioneers are conducting EAuctions as per government directives. As people are getting familiar with the new methods, auctioneers/vendors remain confident of demand revival, backed by a pick-up in infrastructure activities and a possible healthy agri-season. However, with the possibility of another round of lockdown, uncertainty brings the negative sentiment among buyers. Though night curfew has limited significance, lockdowns in weekends have an adverse impact.


* Passenger cars (taxis) most available followed by Private cars/2W/school buses; CV supply remains weak due to lower repossessions: Passenger vehicles (cabs/taxis, etc.) were the most repossessed (or even surrendered) followed by private cars and two-wheelers. Even school and private staff buses also are repossessed and now likely to be scrapped in the absence of demand. Used commercial vehicle (CV) supply still remains weak amid softer repossession from financiers but things should improve from hereon with recent Supreme Court judgment over the recognition of NPAs.


* PSU banks most aggressive in repossessions; NBFCs remain relatively liberal: Among financiers, PSU banks had been the most aggressive in recent months with major contribution in inventories coming from them. Private Banks have limited presence in commercial cars which in turn results in lower contribution. However, NBFCs are relatively liberal toward repossessions and are betting on gradual recovery (especially in H2FY22) and are also relatively cautious toward lower recovery pricing recently.


* Buyers remaining price sensitive is yet another reason for slower repossessions: Our discussions with vendors indicate that buyers are mostly from the retail segment with relatively better financing availability and are able to command price. Even during EAuctions, bid prices generally remain compressed than ask prices. This translates into more losses for financiers and could be another reason for slower repossessions, especially in the CV segment. Elevated fuel prices are yet another discouraging factor, resulting in rising demand for CNG vehicles.


* CIFC and SHTF best-placed to play the revival in used vehicle demand: We expect a revival in used vehicle demand, backed by the improvement in economic activities, along with clarity regarding the scrappage policy. We had seen a sharp consolidation among financiers with only a few players managing to stay in the business so far. In our coverage universe, Shriram Transport Finance (SHTF) remains the largest player in the used vehicle segment, while Cholamandalam Finance (CIFC) is expanding their presence. We reiterate our preference for CIFC (Buy, TP Rs598) and SHTF (Buy, TP Rs1,595), considering their increasing reach, improving liability franchise and relatively better asset-quality profile.


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