Moving to smaller resumes is an opportunity, says Rajiv Lochan

Sundaram Finance saw a changing of the guard at the helm as the second wave of the pandemic swept the nation last year. Rajiv Lochan took over the position of Managing Director of Sundaram Finance on April 1 from TT Srinivasaraghavan who retired after 38 years with the company. Mr Lochan, who is nearing the end of a year in office, highlighted the opportunities he saw for the company – financing operators migrating from M&HCVs to medium and light commercial vehicles and a focus on stable asset classes such as passenger cars ( PV’s). This would help mitigate the impact of the cyclicality of the heavy-duty truck business. Excerpts:

You took over the management during the second wave of the pandemic. Have your plans changed in any way after taking command?

When I started on April 1st last year, continuity was on my agenda. Covid had slowed down a number of things. The expectation was to take stock of the possibilities at such a challenging time and shape the way forward. We continue with the tried and tested trinity of growth, quality and profitability and are finding a balance between the three, and I believe this will serve us well. My focus is to see if we can take each of these three areas up a notch given the market opportunities available and the capabilities we have built across client segments, geographies and asset classes. In the last 15-20 years we have grown by 12-15% annually. We believe there is a chance of increasing this to 15-18%. We want to build consistency. We see the next 5-10 years as an interesting time. Later in the decade, Sundaram Finance will be 75 years old. We are also working on what should then characterize us.

What is your growth strategy now that the pandemic is receding?

One of the strategies is to try to decouple from the commercial vehicle (CV) cycles that we have been exposed to in the past. We started diversifying almost two decades ago and have come a long way since then. Historically, medium and heavy CVs (M&HCVs) accounted for 50-55% of our business. Now it’s about 40% and we want to reduce that to a third of our portfolio. Dynamics in the CV space have changed dramatically with the corporatization in the M&H CV segment resulting from the introduction of GST and axle load standards.

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 haulage companies that were previously in the M&H CV segment are moving into the lower end of the spectrum into medium CVs and light CV segments within the CV space. Some of them also buy used vehicles. This opens up new opportunities for us.

The small commercial vehicle (SCV) segment is very interesting as it really opens up the whole spectrum from the 1 ton to the 4 ton segment. We see a lot of growth opportunities there. It fits very well with our goal of serving the underbanked customer, which we understand. We’re seeing 10-15% growth in the SCV space. The ticket size has also moved up. It’s a segment that’s growing well and gaining importance for us.

Passenger cars make up a quarter of our portfolio. It is a stabilizing asset class as there is no cyclicality in this segment. The medium term is looking good for the auto segment as it is a large retail asset class that will only grow as the Indian middle class evolves and aspires.

There is a lot of runway in the newer segments such as construction machinery, tractors and agricultural machinery. Each of these is quite large.

The task now is to find the right asset class mix. My goal would be to have about a quarter in M&HCV, a quarter in retail CVs, another quarter in passenger cars, and the rest in newer asset classes like construction equipment, tractors, and farm equipment. This is a well diversified portfolio with very different cyclicities and trends in asset quality and profitability.

At the end of Wave 1, we were hoping for a rebound in the M&HCV space earlier this fiscal year. And then wave 2 hit, delaying the recovery process. We finally see the recovery. There is now a lot of movement in the CV space, particularly in the tipper segment, driven by the government’s infrastructure push. In Q4 we see almost as much selling as in the previous six months in some markets, driven partly by real activity and partly by GST-related purchases by the major fleet operators at the end of the year. I anticipate a steady recovery in M&H’s CV space over the next fiscal year.

SF had previously spoken of an expansion beyond the southern market. Their quarterly figures for December show a 20 increase in store count in the North. Is that natural?

In the past, we’ve been cautious about expanding north of the Vindyas. However, over the last 5-7 years we have seen strong growth in Rajasthan, MP, Chhattisgarh, Uttarakhand, Himachal Pradesh and Punjab across all asset classes. We’ve gotten a little more enterprising in the north and are focusing on increasing our presence there. We are also excited about the growth prospects in the West Indies with well established teams and strong leadership. In recent years, the East has gained traction. Orissa was an intriguing discovery in the CE, Tractor and CV segments. We also did well in West Bengal. These non-South regions have grown almost twice as fast as the company’s overall growth rate on all metrics — branch network, assets under management, client base, and payouts. The Northeast is the ultimate frontier and we are evaluating growth opportunities there.

In the south, Karnataka offers the most runways and will be the growth market for us in the short term. We believe that Karnataka (currently with 45 branches) is promising and could grow as big as Tamil Nadu (with 100 branches).

They have improved the used car segment and show promise…

Used vehicles is another interesting area where we have been doing some research nationwide over the last 2-3 months. We have grown quite well in selected areas in recent years. Now we’re going to give it a more focused Pan-Indian boost. It’s quite a big space with a different ecosystem that we’re behind now. We have only scratched the surface and see this as a very interesting growth opportunity as it serves our customer segments well, particularly in the CV space, especially as many of the small operators are moving into the used vehicle segment. We are in the process of strengthening this. Our plan is to provide a reasonable amount of thrust and resources over the next 3-4 years to grow our capabilities and become a significant player in this segment.

Is EV financing different from your core business?

This is a segment we cannot ignore. From a financial point of view, however, there are some challenges. We try to understand the challenges related to the total cost of ownership for the customer – the battery technology, the durability and cost of the battery in relation to the cost of the vehicle, as well as estimating the residual value of the vehicle. We have allocated some funds to study trends in this area and closed some deals in the tricycle and SCV space just to learn and build expertise. The interest and mood of the customers also increases. We’ll have to wait and see how things develop in this space.

Is co-lending with banks beneficial for NBFCs? The risk is ultimately yours…

The co-lending space is now beginning to find reasonable traction. The RBI regulation a few years ago gave us the opportunity to work with both banks and other NBFCs in the co-lending space. Banks come with the benefit of cost of funding, total assets…it’s also an opportunity for them to meet their priority sector commitments. We bring the power of last mile delivery and customer retention to the root. The risk can be shared in ratios that the two partners agree on. So this is negotiable.

There is also an opportunity to work with other NBFCs and we will explore regions and asset classes where they could add value for us. We have already financed smaller NBFCs as part of our commercial lending business. Of course, any kind of co-lending arrangement could start here.

Are you looking at other business areas?

One of the positive developments is that leasing is good for us again post GST and this is gaining traction across all asset classes. As we have a decent track record in leasing, we stand behind it. Another area in which we are tapping into long-term growth opportunities is SME financing. We launched a secured lending offering in the textile, pharmaceutical, life sciences, auto accessories and supply chain finance sectors. We’re off to a good start and I think we can make a significant contribution in this area in the years to come, by helping entrepreneurs scale and also helping them lower their cost of funding over time.

What about digital adoption for a traditional company like Sundaram Finance?

Indeed, the COVID-19 pandemic has contributed to faster adoption of technology in the enterprise. Readiness on the digital front has meanwhile increased, and the use of technology in the company has increased significantly during this time. We’ve found that 30-40% of the frontline team’s time is spent on administrative work, and we’re now working to use technology to simplify processes. I see technology and data as a big enabler, and the digital apps we’ve built for our field workers will significantly reduce the time they previously spent on physical reports, freeing up their time to do more with the customer . We will continue to lead with physical (presence) and enable with digital. This fits very well with our slogan “Enduring Values ​​- New Age Thinking”.

What is your outlook for the future?

Whilst the last few years have been quite a difficult time for the country as a whole and also for us due to our focus on CV’s, I believe that the next 3-4 years will be different to the past and will set the tone for India’s rise to superpower. There will be calmer waters and steadier growth, and I expect the period of fluctuations to slow down. On the way to becoming a middle-income country, the medium-term prospects are one of unprecedented prosperity and abundance, in contrast to an era from the past when there was scarcity. The post-liberal generation is now embracing parenting and we will see a marked shift as they are wealthier, more tech-savvy and most importantly, more risk-takers. All of this comes together. The next 5-10 years will be an interesting time for the country and it will be a different one Bharat.