‘The leasing and higher purchases industry which is now at Rs 213 bn can grow to about Rs 1.2 trillion by 2018,’ said Naveen Gunawardane, head of investment banking at Capital Alliance.
‘That is about CAGR (Compound Annual Growth Rate) of 25 percent through 2018.’
Sri Lanka, following the end of an almost three decade long civil war two years ago, is witnessing accelerated economic growth and is targeting to double per capita GDP to USD 4,000 from the current level of USD 2,400.
Coupled with the assumption that the economy continues to grow at 7 to 8 percent a year, disposable income is set to increase paving the way for a boost in vehicle ownership and upgrade.
‘What that means is there will be more disposable income and vehicles will become more affordable to people. So we expect to see a growth in terms of the number of vehicles,’ said Gunawardane.
‘As vehicles become more affordable people will start migrating from motor bikes to cars. If you look at Malaysia, that has already happened. 80 percent of vehicles in Sri Lanka are motor bikes. Cars make up about 20 percent. In Malaysia it's like 50/50.’
Gunawardane was speaking at a press briefing held to announce the initial public offering of People’s Leasing Company, the largest leasing firm in the island.
The company plans to raise Rs 7 Bn by selling one fourth of its stake to the public in what would be the second largest IPO on the Colombo bourse after celco giant Dialog’s IPO in 2005.
According to Capital Alliance, Sri Lanka’s current GDP per capita suggest a vehicle growth of 1.3 times faster than GDP, or 8 percent per year.
‘Some academics studies have shown that a country who’s PCI is less than USD 5,000, vehicle growth is at least twice the level of growth in GDP,’ said Gunawardane.
Reduced import duties and lower interest rates increased vehicle sales in the country by 800,000 since 2009, according to statistics by the department of motor traffic.
Capital Alliance says Sri Lanka should expect 7.2 million vehicles by 2018, accompanied by a change in the mix.
Motor cycle owners will upgrade to cars while the number of house holds which can afford vehicles will double through 2018, if the country maintains a real GD growth of six percent.
Sri Lanka’s leasing and higher purchases market is spread among over 80 players including banks which offer leasing facilities, but the larger asset base and wider reach has given banks an edge over specialized leasing firms.
‘Well they have a wider branch network but again the key thing is that it is a specialized business and it is not the banks’ core business,’ said Gunawardane.
He noted three fourths of the market is in the control of five players, indicating the bigger players are better positioned to get a better slice of the market. However he foresees a phase of consolidation in the industry.
‘If you take a step back and look at a more macro picture, certainly in the long run maybe in a 10 year horizon you may expect to see some sort of consolidation in the industry.’
‘I would certainly see some of the smaller players either being acquired or merging with each other. Because competition is going to be quite stiff.’