7 Oct 2019

Scrappage policy may fuel demand for used trucks

The upcoming government policy on scrapping old vehicles is expected to drive demand for used trucks that are up to 10 years old, leading commercial vehicle financier Shriram Transport Finance Co. Ltd (STFC) said.

Under the vehicle scrappage policy which aims to phase out older, polluting vehicles and boost auto sales, owners of trucks which are 15 years or older may be forced to pay far more to renew their registration, Mint reported on 23 September.

According to Umesh Revankar, managing director and chief executive of STFC, someone who owns a 20-year-old truck would look for a relatively newer vehicle, say a 10-year-old truck, but not a brand new vehicle.

“A small-time trucker whose livelihood is based on his truck that he operates will look at acquiring only a second-hand truck. This is so because he does not need a new vehicle for the application for which he uses his current vehicle," he said, adding trucking applications and plying distances typically are the two most critical parameters in this space.

While small fleet operators, who typically own fewer than five trucks, account for about 70% of all road transport operators in India, medium-sized fleet operators (owners of 6-20 trucks) account for about 15-18% of the pie with large fleet operators accounting for the rest.

“Every year, new vehicles sold will only add to the existing fleet unless some of that is getting scrapped. The scrappage of vehicles in India has been so low that whatever is sold keeps on increasing the existing pie," Revankar said.

Revankar said for STFC, loans for 5-10-year-old trucks comprise more than 50% of all loan disbursals.

Small truck owners will also prefer to buy relatively-newer used trucks to replace their 15-year-old trucks, given that new trucks are expected to become more expensive with the BS-VI regime kicking in.

This is expected to increase demand for 5-10-year-old trucks, which will trigger a subsequent increase in the value of these vehicles in the near term, added Dewan.

“We estimate that about 45 lakh medium and heavy commercial trucks ply on roads, out of which over 3 lakh units would be 15+ years old," Dewan said. The number does not include light commercial vehicles (LCVs). The expected growth in used CV volumes would augur well for non-banking financial companies (NBFC), said a Kotak Institutional Equities report, which further points out that used vehicles comprise 89% of STFC’s AUM (assets under management). The company typically funds vehicles up to 8-9 years. Vehicles over 10 years are about 5.5-6% of its portfolio, the report said. “Operators shifting to younger vehicles will improve volumes and to some extent, pricing of 7-8-year-old CVs indirectly benefiting STFC and other NBFCs," the report said.