What if someone were to tell you that you could ride a high-end sedan or the SUV that you always wanted to drive for three to five years rather than own a run of the mill sedan or a hatchback? The catch: you do not own the high-end car but just lease it for a particular period.
Many companies and individuals seem to be taking to the leasing way which is growing along with the automobile industry which is slowly recovering from a dampening demand. At a time when the passenger vehicles sales grew for a straight third month in July signaling a recovery in the automobile market, car leasing too is expected to continue the pace. Industry trackers say that the leasing industry has been continuously growing for the past three years.
Automobile sales including cars, utility vehicles and vans grew to 1,99,000 units a jump of about 6.5 per cent in July this year compared to July 2013 according to Society of Indian Automobile Manufacturers (SIAM). In the first four months of the fiscal, the passengers vehicles grew by 2.5 per cent, while overall auto sales grew by 11 per cent to 6.4 million units.
In India, leasing primarily means enticing top executives with high-end cars, which are leased, and which are part of the perks of the executives. Industry experts say that the leasing industry in India is growing at the rate of around 20 per cent year on year. This however, is on a small base of 36,000 cars being leased every year by a handful of players. The lease car business is expected to grow at a faster rate by 2015 despite the slowing down of the economy.
More than 95 per cent of the cars are being leased by companies in India as part of the compensation package to their employees or as part of the companies fleet. Many companies have also started leasing out cars instead of buying them out, and this number is growing as apart from the big corporates, even small and medium companies are being attracted by the leasing firms. While the cars being leased by individuals are a small percentage of the total lease segment, some players are also betting that it is expected to grow at a faster pace.
Industry trackers say that the cars leased in India fall under two types operating lease and finance lease. Under operational lease, the leasing company would lease out a car to the lessee (customer or borrower) for a fixed period, say five years, and at the end of the tenure, the car would be returned back to the leasing company. For these five years, the leasing company would be responsible for the maintenance, insurance and other expenses of the car. At the end of the leasing term, the leasing firm would take back the car. The lessee would have an option to buy back the car at the residual value. Meanwhile, in the finance lease, at the end of the tenure, the car would be bought back by the lessee at a predetermined price notwithstanding the market price of the car at that time..
In India, the finance lease is an unorganised sector and there are no figures available for this segment. The total number of car under operational lease including the top players is 36,000 and growing more than 20 per cent year on year.
In the operational lease segment, there are six major players who are present in India and who amongst themselves command more than 90 per cent of the total market share. Lately many automobile firms especially the top end ones like BMW, Mercedes and Audi too have entered the leasing segment with their own models.
The leasing segment is growing because more and more firms are now opting for leasing a car than owning one; the segment has grown fastest in last two years. May be because companies are realising that owning a car is costlier than leasing it, says Suvajit Karmakar, chief executive officer, ALD Automotive. ALD, a Europe based firm, currently has a fleet size of 8,500 cars in India and expects to touch a fleet size of 10,000 by the end of 2014. ALD is targeting Small and Medium Enterprises for the growth. The company has also devised some new structures in the leasing vertical to attract the SMEs.
While the automobile industry is directly linked to the peoples optimism or emotions while buying a new car, but not so for the leasing industry. Luckily for the leasing industry, the consumer sentiments are not as important as the decisions taken by corporate. In fact as buying a car becomes more expensive companies would increasingly opt for leasing, said Sunil Gupta, CEO, Avis India. Avis India, a joint venture between Avis Europe and the Oberoi Group (EIH), which currently have about a fleet of less than 1,000 cars plans to have about 4,000 cars by 2016.
Of about 20 lakh cars sold in 2013, around 4 lakh are bought by the companies. Many in the leasing industry say this is a potential for leasing firms as they can convert a large chunk of the corporate purchases to lease. Leasing accounts for about 40 per cent of the total car sales in the Europe and the US and the Indian leasing industry is still in the nascent sage compared to that. Industry trackers say that for a company as against an individual buyer, leasing a car also makes sense as; many banks do not give loans to certain companies to buy a car beyond a price range. The same car could be leased as it is shown as an expense in the balance sheet of the company.
Currently most of the cars – from a Tata Nano to a high end Jaguar – are being offered by the leasing companies. The number of high end cars in the total pie is more than 75 per cent.
The Way Ahead
While 20 per cent year-on-year growth may look really impressive, many analysts point out that the base of leasing is very small, especially in a country where around 2 million cars are sold annually. The penetration of the leasing industry, including both operational as well as finance lease is around 4 per cent in India.
The real growth would come from leasing to the individuals and not companies but in India the first challenge is to convince the buyer that not owning a car is cheaper. Secondly the leasing companies do not have an infrastructure equivalent to banks or NBFCs who can access individuals credit history, says Anindya Chakraborty, managing director and chief executive officer, Tranzlease, an Indian company which has a fleet of about 1,500 vehicles. Tranzlease plans to double the size of its fleet by the end of 2014. The company also has plans to start an NBFC by which it could then tap the individual lease segment. Industry trackers say that while it would be a credit risk for leasing companies the growth could be faster in individual leasing segment than business to business leasing currently.
While the leasing companies could take anywhere around five years before they enter the individual lease segment some of the bigger car manufacturers are already present there. Car firms like BMW, Audi and Mercedes already have presence in the individual leasing segment through their finance subsidiary.
For any individual opting to lease the top end cars the cost of the car at the end of the leasing tenure roughly comes to about 50% of the total price of the car. This and the individual or the company does not have to pay for the down payment. None of the companies provide the breakup of the sales figures and what percentage of the sales is through lease.
For the leasing industry the interest rates in the automobile loans does not come in the way of growth, but the interest rates per say could just slower down the growth. While it cannot be said that there would be no impact of the interest rates on leasing industry it is minimal. Also the biggest challenge for the leasing industry is that of awareness and I think the fleet size could double in next few years if we could overcome this, says Rahul Maroli, general manager, commercial, at LeasePlan India.
Industry trackers say that a sudden boom is also seen in leasing of multi utility vehicles and light commercial vehicles. Currently LCV and MUV consist less than 10 per cent of the total lease universe but it would double in two to three years. There is a huge growth in this segment in the coming years, adds Maroli.
Write to Sachin@businessworld.in