Auto: The Time Has Come
The passenger vehicle market in India is poised to become the third largest in the world in the next three to four years. And with that, vehicle fleet leasing is expected to take flight. Although the concept of car leasing has been around for over a decade, it isn’t a very popular option as Indians still prefer owning cars. But in the next five years, the industry expects car leasing to grow in double digits as the implementation of Goods and Services Tax (GST) simplifies transactions and benefits leasing vis-à-vis outright vehicle purchase.
The Basics
Fundamentally, there are two types of leasing: financial and operating. Under the latter, a vehicle/asset can be used by a customer for a period of time, generally much shorter than its expected life, for a monthly rental to the leasing company. During the contract period, the customer gets the right of usage and possession of the asset, while the leasing company continues to hold the ownership of the said asset. At the end of the period, the customer has to return the asset to the leasing company.
In financial lease (also known as capital lease), the risks and rewards related to ownership of the leased asset is transferred to the lessee. At the end of the lease period, the title of ownership might or might not be transferred back by the lessee.
The Market At Large
Last financial year, passenger car sales crossed the 3-million mark — double the number a decade ago. Around eight to 10 per cent of the sales formed the corporate car share. Of which, around 30,000 were obtained through financial and operating leases. So that translates to around 1 per cent of new deliveries.
Presently, the size of the order book for leased vehicles, with an average ticket price of Rs 5.5 lakh per unit, is worth around Rs 5,000-6,000 crore per annum. The total new vehicles bought on lease is pegged at Rs 2,500-3,000 crore per annum, and is expected to triple by 2022 as the holding period for car ownership is coming down drastically to less than two to three years from seven to eight years a decade ago. As per industry estimates, over 1 lakh passenger vehicles are leased in the country today.
Some of the top players operating in this space are LeasePlan India, Avis India, BNP Paribas- owned Arval India, ALD Automotive India and ORIX Auto Infrastructure Services. Premium carmakers such as BMW and Mercedes Benz India are also running their own leasing services.
Ready To Take-off
With the ease of business improving in the country and forward-looking initiatives such as GST, ‘Make in India’ and smart cities being implemented, multinational giants are not only expanding in India but are also pushing for globally accepted practices such as vehicle leasing. And the rise of app-based car aggregator services such as Ola and Uber, which have literally disrupted the mobility landscape in the country, is further strengthening the prospects of leasing firms in India.
Sanjeev Prasad, Managing Director, LeasePlan India, says, “Vehicle leasing is not an invention. It’s been there in mature markets such as Europe and the US for many years. The corporates there rarely buy cars, and instead follow the leasing route. It makes a lot of sense for them administratively, financially, and also for mitigating risks. But in India, fleet leasing is yet to take off in a gigantic manner as the level of awareness among stakeholders is quite low here. However, the situation has improved lately, and with the implementation of GST, I am confident the whole process will be further streamlined.”
As Prasad points out, nearly 50 per cent vehicle sales in the US and 40 per cent in the UK are on lease. In mature markets where consumers’ preferences have evolved, even retail customers get vehicles on lease.
But the dynamics are changing rapidly. Says Arval India MD Mike Curtis, “Growth in leasing is aligned to the increasing prosperity of a country, maturing of the business car model and the simplicity of operating lease where car purchase, fleet management, relief car, accident repair are all taken care of by one supplier.”
Target Groups and New Vistas
Some of the early adopters of car leasing were Fortune 500 companies such as Microsoft, Coke, Pepsi, Barclays, LG, Honda, Coke, U-Flex, Deloitte, Sandvik, Syngenta and Monsanto. Several Indian companies such as PI Industries, Dr. Reddy’s Laboratories, Gharda Chemicals, Dhanuka, Agritech and QH Talbros too have joined the bandwagon.
Says Prasad, “We are 100 per cent into operating lease. Initially, we targeted global MNCs, but soon started working with Indian companies with a global outlook. Eventually, we started receiving orders from Public Sector Undertakings (PSUs) too. The Directorate General of Supplies & Disposal, which controls all purchases of the central government, is now actively looking at leasing.”
He further adds, “While the concept has gained acceptability in tier-1 cities (metropolitan cities), tier-2 and 3 cities are also fast becoming focus markets for leasing companies.”
Benefits of Leasing
In a country where as much as 70 per cent of the total cars sold per annum are through vehicle financing, there’s a great scope for car leasing (currently, comprising 1 per cent of auto loans).
“Employees who lease cars through an employee car scheme benefit from a very tax-efficient system. They pay the rental charges out of their pay packet, and the lease rental is deducted from their gross pay,” says Sandeep Gambhir, MD & CEO, Orix Auto Infrastructure Services.
Echoing his thoughts, ALD Automotive CEO Suvajit Karmakar says, “Over the last few years, organisations have become smarter and wiser in maintaining their finances. While they may need a vehicle, they need not show the leased vehicle in their accounts. We offer full-service operating lease where funding, maintenance, tyres, insurance, etc., are all taken care of by us. With these solutions, our clients can rest assured that their employees are driving well-maintained vehicles.”
On An Expansion Spree
In the wake of growing demand from corporates in India, leasing firms are ramping up their fleet to cater to new clients as well as existing clients on a greater scale.
LeasePlan India — part of the Dutch company that first offered leasing services in India in 1999 — is looking to expand its fleet of 14,000 (self-owned) vehicles to one lakh by 2022. “Our entire portfolio of 14,000 vehicles is itself worth Rs 800-1,000 crore. Going forward, we might spend a similar amount within a short span of time. It will ensure that our annual turnover of Rs 300+ crore will more than treble by early next decade,” says Prasad of LeasePlan.
Avis India — a joint venture between Avis Budget Group and The Oberoi Group — has 6,000 premium cars and a network of 50 rental stations in 20 cities. The company is taking rapid strides in striking deals with multinationals. The MD & CEO of the company Sunil Gupta says, “Basically, we want to have a fleet of 10,000 cars and clock a turnover of Rs 600 crore in the next three years. It is very important for us to keep innovating to offer solutions for ever-evolving customer needs as well as deliver high-quality service consistently to not only grow our customer base but also to maintain it.”
Far ahead of Avis India is French leasing firm ALD Automotive, with a fleet of around 11,500 vehicles catering to over 900 corporate customers in nearly 300 locations across the country. Plans are afoot to have over 1,000 clients and a fleet of 17,000 by 2020. Clocking a turnover of
Rs 300 crore, the company aims to double the figure in the next five years.
Delineating his thoughts, ALD’s Karmakar states, “When we began our operations, the primary objective was tapping foreign multinationals in order to capture the (vehicle leasing) market. But today, nearly 40 per cent of my portfolio (of clients) comprises Indian companies. Going forward, there is a possibility that India can become our top five markets globally.”
Future Outlook
Leasing firms unanimously feel that while large corporates would be their main target group, PSUs, startups, small and medium enterprises, and independent professionals remain high-potential customers, just as short-term rentals and corporate car sharing are high-potential markets.
Once the awareness sets in, retail customers would also start demanding leased product from dealers. And that time is not very far away.
