Auto: Car Leasing Set To Vroom
S Viswanathan, Founder & CEO of Chennai-based Inspace Technologies, was recently in the market for a new high-end SUV. But unlike his last SUV, a Ssangyong Rexton that was bankrolled by an auto loan, this time he picked up a Rs 28.5 lakh Hyundai Tucson SUV (2018 version) on a five-year lease from OTO Capital, an automotive leasing startup. All he had to do was shell out Rs 2.85 lakh (10 per cent refundable security amount) as upfront payment for the car in addition to the monthly lease rental of Rs 50,000.
Leasing the SUV made perfect financial sense to Viswanathan, 45. “Why should I invest in an asset (a new car) which is depreciating? I compared the bank rates with the leasing rates. The asset is with them (lessor) which is okay. But the good thing is liability is not in my (company’s) books. It is only coming as an expense for me per month,” he says.
Viswanathan explains that since the car will be an expense in his company’s books, he stands to save Rs 2 lakh per year in income tax benefit as well, which will add up to Rs 10 lakh over five years. “My book value after five years is only Rs 8-8.5 lakh. I can give the car back or continue the lease for another year. Furthermore, I can sell the car in the market if the price is going higher than the book value,” he adds.
While the tax efficiency of a leased car in the hands of the lessee is an important factor in favour of leasing, there is a growing shift in consumer preference for leasing a vehicle rather than owning one due to a host of factors. For one, in times of economic and regulatory uncertainty, it makes sense to keep one’s liabilities low.
For another, as Sumit Chhazed, Co-founder, OTO Capital, says, “The frequency with which new car models are being introduced and the rise in usage of connected cars is rapidly changing the vehicle ownership experience. The upwardly mobile younger generation of Indian customers are keen to get to their dream car earlier, without being stuck with it forever. The first-car buyer age has come down significantly and customers are now seeking faster access to vehicles, low-cost EMIs and quicker upgrades.”
Besides, in an operating lease, the car comes packaged with a variety of services. In fact, a car on lease gives the lessee 24x7 mobility without any of the hassles of maintenance, ownership and disposal, with a brand new car at the end of the lease term to boot.
“There is also a shift from a higher commitment ownership model to a slightly lower commitment model which comes with leasing. One of the significant causes for the recent slowdown of the automotive industry is believed to be caused by challenges in financing vehicle buys,” says Chhazed.
But is the pick-up in car leasing the result of the slowdown in auto sales? Says Sunil Gupta, Managing Director & CEO, Avis India, “The slowdown in the auto industry is due to diverse reasons — trend towards access to cars (Ola, Uber etc) rather than ownership of cars, reduced car loan financing due to the NBFC crisis and uncertainty about the regulatory situation in the near term. The slowdown has been caused by the postponement of car purchases. On the other hand, the trend towards access rather than ownership has, in fact, led to a spurt in car rentals, ride-hailing and ride-sharing for short-term use and to car leasing and car subscription for longer term use.”
A fledgling market
At least 60,000-80,000 cars are leased annually in the country and this is expected to go up to 3-4 lakh. However, the yearly offtake is approximately 35,000 cars across all leasing companies in India. Although the numbers have remained flat in FY19 and are likely to remain so in FY 20 due to market conditions, industry players expect 25-30 per cent growth from next year with the introduction of retail products as well as OEMs also actively supporting the new financing models.
Says Sandeep Gambhir, Managing Director and CEO, Orix Auto Infrastructure Services, one of India’s largest car leasing and rental companies: “We expect a good jump in the leasing model in the future. There will be a big shift in our retail leasing space where individual users / SME customers will get a leasing product from the dealership counter.” Orix expects to lease 7,000 cars this year and double it in a couple of years.
Gupta of Avis India is equally gung-ho. “The car leasing market in India, which is potentially worth Rs 1,500 crore, is expected to expand at a CAGR of 10-12 per cent over the next five to seven years.”
The current focus on “access” has given rise to a subscription model as well. But although operating lease is akin to a car subscription it is superior to it since it comes with a tax break and a private number plate. Zoomcar’s ZAP Subscribe, for instance, offers new and older cars for a monthly fee, which includes maintenance, GST and insurance. Tenure ranges from 6, 12 and 18 to 24 months. ZAP Subscribe offers lessors the option to share a car with others for a payment when they are not using them.
According to Vinay Piparsania, Global Consulting Director – Automotive, Counterpoint Technology Market Research, Subscriptions are perceived to be more expensive than buying, and hence will not appeal to value-conscious buyers.
“The subscription models possibly have the highest potential with millennials, firstly being a significant percentage of the next gen car using population, and secondly, being more open to pay premiums for convenience and flexibility, and looking to avoid the burdens of ownership and maintenance,” says Piparsania.
OEMs going the extra mile
Along with vehicle leasing firms, OEMs too are also taking rapid strides in the leasing space. India’s largest carmaker Maruti Suzuki has started offering end-to-end leasing services specially designed for entrepreneurs and corporate entities. Maruti Suzuki Leasing offers a suite of services such as vehicle acquisition, insurance, maintenance and other value-added services like fuel maintenance, provision of drivers etc. In FY19, Baleno was the top leasing model, besides Swift, Dzire, Vitara Brezza and Ciaz.
“Maruti Suzuki leased over 6,700 units in FY19, growing 71 per cent over FY18. As the market matures, we expect leasing to become a substantial contributor in the overall vehicle demand,” says Shashank Srivastava, Executive Director, Marketing & Sales, Maruti Suzuki India.
Similarly, Hyundai Motor has entered into a white-label partnership with ALD Automotive to offer leasing products to potential customers. “Leasing is catching up well with the urban customers and is helping in increasing Hyundai’s penetration in this vertical,” says Puneet Anand, Senior General Manager & Group Head (Marketing), Hyundai Motor India.
Toyota Kirloskar Motors (TKM) has tied-up with a lease player for lease promotion through dealers and is also exploring in-house leasing operations. “Currently, a pilot project in Bangalore for leasing in underway and the response has been good. Further we are exploring to expand to other markets and grow this business further,” N. Raja, Deputy Managing Director, TKM.
Suvajit Karmakar, CEO, ALD Automotive India says leasing enquiries at his firm have gone up after they introduced leasing for individuals and small businesses. “Our partnership with OEMs like Hyundai has helped us leverage the reach to a larger base of audience,” Karmakar adds.
Mahindra and Mahindra (M&M) has invested Rs 176 crore in Zoomcar and also rolled out lease services with Orix and ALD Automotive. It has also announced the introduction of a subscription-based initiative in partnership with Revv for retail customers. Says Veejay Ram Nakra, Chief of Sales and Marketing, Automotive Division, M&M, “With this flexible, highly affordable offering, we hope to help our customers fulfil their aspiration of driving their desired vehicles without necessarily owning them. This in turn will also attract a whole new set of customers to brand Mahindra.”
Honda Cars India (HCIL) recently announced its car leasing services in association with Orix, which will allow consumers leasing options for Honda CR-V, Honda Civic and Honda City. The company is also gearing up to introduce leasing options for individual customers such as self-employed professionals, businessmen, and salaried individuals.
“With leasing, customers have the opportunity to opt for a bigger car than what they can opt in case of purchase in a given budget. So, for example, a customer with a purchase budget for Honda City can actually opt for a bigger car Civic with only some adjustment in monthly lease rental and without worrying about down payment,” says Rajesh Goel, SVP and Director, Marketing and Sales, HCIL.
The road ahead
All said and done, industry analysts reckon that the concept remains a niche in India. As Piparsania puts it, “Car leasing has nearly 50 per cent penetration globally, against under 5 per cent in India. The business model and profitability have several question marks, and is generally perceived as expensive. Besides, owning a car continues to remain an aspiration and status symbol. Sales growth momentum and ownership appeal are high. Leasing and subscriptions are felt to be expensive, and does not appeal to value-conscious Indian buyers.”
