Demand for two-wheelers, tractors and passenger vehicles has led to an accelerated recovery in the vehicle finance (VF) sector over the past six months, equity research firm Motilal Oswal Financial Services said in a report.
Accordingly, the report predicted that credit costs across vehicle finance (VF) players is expected to be 1.7-4.4% in FY21 and gradually revert to run-rate levels over FY22-23.
"By August-September 2020, sales in most product categories picked up to prior year levels. PV sales for the industry improved significantly to nearly 100 per cent of prior year levels in 2Q from sub-30 per cent levels in 1QFY21," the firm said in the report.
Similarly, 2W and tractor sales surpassed prior year levels in August and September. "2W and PV segments have benefitted from the preference towards personal mobility solutions. Tractors have benefited from a healthy monsoon in 2019, coupled with a strong Rabi crop," the report said.
However, the M&HCV segment continued to be a laggard. "This segment was under pressure even prior to the Covid-19 pandemic. The channel checks suggest that used CVs are witnessing strong demand given the price hikes in new CVs," the report said.
"The checks also suggest that retail festive sales were in-line with prior trends in 2Ws and tractors, and improved sequentially in the case of passenger vehicles."
Besides, the firm pointed out that disbursements by VFs in 2Q were not in line with underlying auto sales due to focus on collections and liquidity preservation.
Nevertheless, it expects a pickup in 2HFY21. "VFs are well-positioned to witness an improvement in spreads as their yields are at fixed rates while most of their borrowings are at floating rates," it said.
"With the moratorium being lifted in September 2020, most players have moved back to 85-95 per cent CE (collection efficiency)."
In addition, the report said that with 120-230bp (basis point) of COVID-19 provisioning over the past three quarters, the overall buffer has substantially improved.
"RBI allowance of restructuring will also provide a breather for exposures facing temporary cash flow mismatches," the report added.