Overall loan volumes high despite low auto demand: M&M Fin

After a slowdown in the auto business, automakers like Tata Motors and auto component makers like Bosch have temporarily suspended operations, citing inventory pile-up as a reason for production cut. In an interview with CNBC-TV18, Ramesh Iyer, MD of M&M Financial Services said that though, the growth rate is slightly lower taking into account the market situation, overall volumes for the company is still quite high.

Iyer said that the demand for tractors has become a little slow and the demand drop in South India is affecting volumes. The hike in petrol prices recently have also contributed to a slowdown in the car segment, believes Iyer. According to him, car manufacturers are now looking at the rural market for growth.
The changes in the automobile demand scenario have made M&M Financial an active player in the second hand vehicle space, informed the MD. The company's non-performing assets or NPAs are also well under control and they are currently, waiting for the base rate to come down, clarified Iyer.  Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying videos. Q: Can you give us an idea of how the volume of business is panning out? You all service a lot of commercial vehicles. We have been getting some disturbing news of both automakers like Tata Motors and auto component makers like Bosch actually not operating for three days in June so that the inventory is drawn down. Under the circumstances how is loan demand?
A: If you look at the overall volumes, it is still very high. The growth rate maybe a little low and earlier it was all being bought, now they will have to sell. I think that's one fundamental change that we are seeing at dealerships.
If you look at the last two year horizon, not too many programs were launched, maybe no financing programs jauntily with dealers. Melas were not happening around the country and people were simply buying. Now I think they will have to reach out to sell.
Some efforts will have to be put into sell and we do see some programs happening. All of us are waiting for at least an average plus monsoon, at least in the market that we work in. In the semi-urban rural market definitely, monsoon is a huge sentiment that all of us wait for. Q: If we can put some numbers into what you are saying, once automobile companies start waiting for inventory to draw down, clearly there is a demand pressure or lack of demand in the system. In the past when you have heard such news, companies not working for about 10% of the month, what would be the normal impact in the months to come? How much do you expect demand to fall by?
A: Let's look at it in two ways. As far as the finance companies are concerned, when the sales demand goes a little low, then efficiency of using the product goes up. For example, if less number of new trucks are going to be sold, the existing trucks get better deployed. Therefore, the recoveries would actually improve for finance companies.
The freight rates may possibly go up when the number of trucks available goes down. That's one way of looking at it. The other way to look at it is the overall volume coming down and therefore, how the response of dealers or manufacturers are going to be in the future.
I somehow think that it will be backed by discounts or give subventions to finance companies and bring down the rate of lending because eventually, the increase in price of a product gets absorbed by the buyer. It's the operating cost which does not get accepted.
I think if the interest rates are kind of subvented by a manufacturer or by a dealer through some kind of a subvention program, then demand will pick up again. If this kind of a large 8-10% drop in numbers happen in a month or two, it does send out a message as to say there is a demand which is kind of shrinking and which is why I am using the term instead of buying now it has to move towards selling. You will see lot of action on the selling side. Q: How have cost of funds panned out? In FY12 margins were under pressure because of this and also because the changing portfolio mix. Have those things stabilized and are you expecting margins to improve?
A: The base rate is continuing to be 10% plus. We are looking at the sky for two things. One, will the rate drop from there and we are also looking at rains dropping from there. One of the two has to fall. If the rates comes down, good news. But, currently the base rates are at about 10% plus kind of a situation. That's not substantially coming down.
The average rate for us has been around 9% or so because we have a mix of funds which is working out well for us. But most of this rate increases in the past have been passed down. Good news is at least it is not increasing. But one has to wait and see whether they do come down and support it in the second half. Q: You would also be aware of the breakup of the auto market, because you have exposure to all of the segments. Have you seen particular weakness in any kind of a segment, say for tractors, because the sales data that comes out every month is indicating that some of the segments are slowing down?
A: I think tractors have gone a little slow. But one has to again look at it from a geographical perspective. I think south is doing little lower than possibly north and west and which is what is impacting the overall number. If Andhra, Karnataka consume less tractors, one has to see the overall numbers. South is doing less and that's impacting the volume. So tractor volumes are more on individual state basis.
One has to see on an overall number basis, south is doing less and that's impacting the volume. We are definitely seeing some slowdown in the car segment. I think it had more to do with the petrol price increase and now with some change in the petrol price, that has been announced, one will have to see whether that drives little more number in the coming months or not.
But, clearly these two segments - car and the tractor segment did see some number drop. I think also from the project side, the tippers which are more used in the projects also saw some lower numbers because of no new projects getting announced. Possibly mobilization advances were not being released, so assets were not being bought. Clearly, these are the three segments where we saw some number dip. Q: Is there a slow down in commercial vehicles too?
A: Yes, I used the term tipper. That’s for the commercial vehicle. Again on the pure commercial vehicle segment, I think the container movers with this kind of a price of rupee to dollar etc and imports going little slow, the container movement is getting a little slower. The container movement, the tippers, the tractors and the cars are the four segments where we saw some number change. Q: How do you expect your assets under management will increase in the current year? I am not saying current quarter because I assume that will be a weak quarter, the monsoon quarter I would assume to be a slack. If you can give me a quarterly run rate fine, but an annual run rate in terms of how much the AUMs might increase and how will spreads behave? You had earlier spoken about 5.9% for the fourth quarter. How may that spread behave in FY13?
A: Fortunately for us, we have become a multi-product financer and not restricted to any single product. A little of all is helping us grow and most of the car manufacturers are looking at the rural markets for their growth. Today, we work with Ford, Toyota, Hyundai, apart from Maruti.
I think we are very comfortable to believe that we will have a good asset growth and while you said this quarter could be a little dipped, the first two months did see a good growth for us in terms of the volume concerned. Our market shares have slightly gone up in most of these products. We have also become an active player in the second-hand vehicle space.
Towards the extent that the new vehicle sales dip, I think we more than offset that with the second-hand vehicle financing. We are not able to see any pressure on us for the AUM growth, even during the year. As far as the margin is concerned, again it’s an output of a mix of products that we are in.
At NIM (Net Interest Margin) levels maybe there is a product mix change which dips the NIM, but on a RoA (Return on Asset) level with good quality of assets our NPAs are well under control even as we saw in the last quarter. It continues to behave the same way.
The collection efficiencies are extremely good and we are also able to bring down our overheads because of the volumes which have gone up. We are buoyant. We are continuing to open branches. We are adding people and our participation in multi-products would ensure that our AUMs as well as margins are not under pressure. Q: As you have said, you have diversified your asset base and sort of derisked yourself from the agri exposure. If the monsoon were to be slightly weak how much portion of your portfolio would be affected or what kind of earnings are at risk given the monsoon weakness that we might see?
A: Currently in our overall portfolio, 18% of the portfolio is tractor. But tractor also now goes for multiple applications. So direct agri exposure would be about 8-10% of the balance sheet.
Again good news is we don't expect India to not do well. But, one is not too sure as to which geographical area is not going to get good rains. As of now, it's too early to say that. But, I think even if you consider 100% of agri exposure, it will be about 8-10% of the balance sheet which will have that kind of a direct exposure.