Sundaram Finance saw a change of guard at the top just as the second wave of the pandemic gripped the nation last year. Rajiv Lochan took over as MD of Sundaram Finance on April 1, 2021 from T.T. Srinivasaraghavan who retired after spending 38 years with the company. Coming close to finishing a year in office, Mr. Lochan highlighted opportunities he saw for the company – small fleet operators going down the size ladder and opting for smaller CVs; and financing of stable asset classes such as passenger vehicles (PVs), both of which would help lessen the impact of the cyclicality of the heavy commercial vehicles business. Further, geographic expansion beyond its traditional core is also on the cards. Excerpts:
You took over as MD during the second wave of the pandemic. After you took charge, did your plans change in any way?
When I took over on April 1 last year, my agenda was one of continuity. Covid had slowed down a number of things. The expectation was to take stock of the opportunities during such a challenging phase and craft the way forward. We are going ahead with the time-tested trinity of Growth, Quality and Profitability, striking a balance among the three and I believe that this will serve us well. My focus is to see if we can take each of these three areas one notch up, given the market opportunities that are available and the capabilities we have built in the customer segments, geographies and asset classes. In the last 15-20 years, we have grown 12-15% compounded annually. We think there is a chance to take this up to 15-18%. We want to build consistency in doing this. We see the next 5-10 years as being an interesting period. Later this decade, Sundaram Finance will turn 75. We are also working towards what should characterise us then.
What is your growth strategy now that the pandemic is receding?
One of the strategies is to try and decouple from the commercial vehicle (CV) cycles that we have been subjected to in the past. Just under two decades ago, we began the diversification journey and have come a long way since. In the past, Medium and Heavy CVs (M&HCVs) used to constitute 50-55% of our business. Now it is down to about 40% and we would like to bring that down to one third of our portfolio. The dynamics in the CV space have been changing dramatically with the corporatisation in the M & H CV segment arising out of the introduction of GST and the axle load norms.
Given where this high-end segment has gone, including in terms of increased tonnage and the high cost of a large truck, many of the small road transport operators, who were previously in the M & H CV segment, are moving into the lower end of the spectrum, into Intermediate CVs and Light CV segments within the CV space. Some of them are also purchasing used vehicles. That is throwing up new opportunities for us.
The Small CV (SCV) segment is very interesting with the whole spectrum from the 1-tonne to 4-tonne segment really opening up. We see lots of growth opportunities there. It syncs up very well with our line of purpose of serving the under-banked customer whom we understand. We have been registering a growth of 10-15% in the SCV space. The ticket size has also been moving up. It is a segment that is growing well and becoming meaningful for us.
Passenger Vehicles contribute to one fourth of our portfolio. It is a stabilising asset class as there is no cyclicality in this segment. The medium-term trajectory looks good for the cars segment as it is a large retail asset class that will only grow given the evolution of the Indian middle class and their aspirations.
There is a lot of runway in the newer segments such as Construction Equipment, Tractor and Farm Equipment. Each of these is reasonably large in size.
The task now is to get the right asset class mix. My target would be to have about one fourth in M&HCV, a fourth in retail CVs, another one fourth in passenger vehicles and the balance in newer assets classes such as Construction equipment, Tractor and Farm Equipment. This will be a well-diversified portfolio with very different cyclicality and, asset quality and profitability trends.
At the end of wave 1, we were hoping for a recovery in the M&HCV space by the start of this financial year. And then wave 2 struck, delaying the recovery process. We are finally beginning to see the recovery. There is now a lot of action in the CV space especially in the tipper segment driven by the government’s infra push. In Q4, in some markets, we are seeing sales almost as much as the previous six months driven partly by real activity and partly by end-of-year, GST-related buying by the large fleet operators. I expect a steady-state recovery in the M & H CV space in the next financial year.
SF had earlier talked of expansion beyond the South market. Your December quarter numbers show a branch count increase of 20 in the North. Is that par for the course?
In the past, we had adopted a cautious approach to expanding north of the Vindyas. However, in the last 5-7 years, we have seen strong growth in Rajasthan, MP, Chhattisgarh, Uttarakhand, Himachal Pradesh and Punjab across asset classes. We have been a bit more enterprising in the North and are focussing on increasing our presence there. We are also excited about the growth prospects in Western India with well entrenched teams and a strong leadership. In the last few years, the East has gained greater traction. Orissa has been a fascinating discovery in the CE, Tractor and CV segments. We have done well in West Bengal too. These geographies outside of the South have been growing almost twice as fast as the company’s overall growth rate on all metrics – branch network, assets under management, customer base and disbursements. North East is the ultimate frontier and we are evaluating the growth opportunities there.
The North also seems to have recovered from the economic impact of the pandemic quicker than the South. Pre-pandemic, South contributed 62% of our disbursements while the North brought in 21%. At the end of December 2021, these figures were 50% and 31%, respectively.
In the South, Karnataka offers the most runway and will be the growth market for us in the near term. We believe Karnataka (with currently 45 branches) holds a lot of promise and could become as big as Tamil Nadu (with 100 branches).
You touched upon the Used Vehicles segment showing promise...
Used Vehicles is another interesting space where we have done a fair bit of study across the country in the last 2-3 months. We have grown reasonably well in select pockets in the last few years. Now we are giving it a more focussed pan-India thrust. It is a fairly vast space with a different ecosystem that we are now getting behind. We have only scratched the surface and see that as a very interesting growth opportunity as it serves our customer segments well particularly in the CV space especially with many of the small operators moving into the Used Vehicles segment. We are looking at ramping this up. Our plan is to provide a reasonable amount of thrust and resource over the next 3-4 years in building our capabilities and becoming a meaningful player in this segment.
Is financing electric vehicles any different from your core business?
This is a segment we cannot ignore. However, there are some challenges from a financier point of view. We are trying to understand the challenges relating to Total Cost of Ownership for the customer – the battery technology, the shelf life and cost of the battery relative to the cost of the vehicle as well as the estimate of the residual value of the vehicle. We have set aside some funds to study trends in this space and have done a few deals in the three-wheeler and SCV space just to learn and build expertise. Customer interest and sentiment is also picking up. We will have to wait and watch as to how things unfold in this space.
Is co-lending with banks beneficial to NBFCs? After all, the risk rests with you...
The co-lending space is now beginning to find reasonable traction. The RBI regulation of a few years ago has provided us with an opportunity to partner with both banks and other NBFCs in the co-lending space. Banks come in with the advantage of cost of funds, balance sheet size... it is also an opportunity for them to fulfill their priority sector obligations. We bring the strength of last-mile delivery and the customer-connect to originate. Risk can be split in ratios that the two partners agree upon. So that is negotiable.
There is also the opportunity to partner with other NBFCs and we will be exploring geographies and asset classes where they could add value to us. As part of our commercial lending business, we have already been financing smaller NBFCs. So that’s where naturally any kind of co-lending arrangement could start.
Are you looking at any other areas of business?
One of the positive developments is that leasing is back nicely for us post GST and this is finding traction across asset classes. Given that we have a reasonable track record in leasing, we are getting behind that. SME financing is another area where we are tapping growth opportunities for the long term. We have rolled out a secured lending offering in the textile, pharmaceuticals, life sciences, auto ancillaries and supply chain financing space. We have made a reasonable beginning and I do think that we can make a meaningful contribution in this space in the coming years, helping entrepreneurs scale up and also assisting them in bringing down their cost of funds over time.
What about digital adoption for a traditional company such as Sundaram Finance?
The COVID-19 pandemic actually helped in faster adoption of technology in the company. There is now a greater willingness on the digital front, and the use of technology has gone up significantly within the company during this period. We found that 30-40% of the frontline team’s time goes towards administrative work and are now working towards using technology to simplify the processes. I see technology and data as a big enabler and the digital apps that we have created for our field staff will significantly reduce the time they previously spent on physical reports thus freeing up their time to do more with the customer. We will continue to lead with physical (presence) and enable with digital. This resonates very much with our tag line ‘Enduring Values – New Age Thinking’.
What is your outlook for the future?
While the last few years have been quite a difficult period for the country as a whole and for us as well given our focus on CV, I am of the view that the next 3-4 years will be different from the past and will set the tone for India’s emergence as a super power. There will be calmer waters and steadier growth, and I expect the period of choppiness to slow down. As we edge towards becoming a middle-income country, the medium-term outlook is one of unprecedented prosperity and plenty, contrasted with an era from the past when there was scarcity. The post-liberalisation generation is now embracing parenthood and we will see a significant shift as they are more affluent, tech savvy and more importantly risk-takers. All of these are coming together. The next 5-10 years will be an interesting period for the country and it is going to be a different Bharat.
