Bounce back expected in post-Aug festival period: M&M Fin

Untimely rains and weak rural demand impacted cash flows in the June quarter, Ramesh Iyer, Managing Director of M&M Financial Services told CNBC-TV18.  The company reported a decline in its net profit by 42.6 percent to Rs 88.9 crore. The gross non-performing assets (NPAs) rose 8 percent. Iyer said the on-ground activity in rural market has been slow leading to pressurized cash flows for customers. The asset book has not improved in the last quarter. The company has 150 days in FY16 for NPA recognition, Iyer said. Iyer expects activity level to remain subdued in the second quarter as well. Going forward, Iyer expects rural sentiments to improve with festival season starting September 2015. Right now the company is preparing for the post monsoon period, Iyer said adding that additional branches have been opened to improve collection efficiencies. While car and pre-owned vehicles segment grew in the last quarter, tractor vertical showed only marginal improvement. Commercial vehicles (CVs) did not see much utilization, but with initiation of infrastructure projects, demand is expected to grow, he said.

Below is the transcript of Ramesh Iyer’s interview with Ekta Batra and Anuj Singhal on CNBC-TV18.Ekta: Let us begin by talking about the asset quality. Gross non-performing assets (NPA) spiked to eight percent. What led to the worsening in terms of the gross non-performing loans (NPL) this quarter and it was expected to be seasonally weak. But did the extent of worsening take you by surprise?A: Not really by surprise since we run the business. We knew it that it was moving in that direction. Firstly, at the beginning of the first quarter, we had untimely rains which cost some disturbance to the crop prices, whether in Maharashtra or in Madhya Pradesh putting pressure on the cash flows. Secondly, the overall activity levels are yet to pick up which we have been saying quarter after quarter. Thirdly, we normally have the first quarter pressures. After the fourth quarter, we do have the first and second quarter in the rural market weak. So, if you put all three together, that is what has taken to a new number up there. But it is also important to understand that the gross percentage is an outcome of also the denominator effect. When the assets do not grow at 20-25 percent, the way it was growing in the past, the denominator effect also comes in. On an absolute basis, the NPAs have gone up and it is an outcome of the cash flow situations that we face in the rural market.Anuj: Could you throw some more colour on what is taking place in the rural markets in terms of collections and defaults. Also, if you could tell us which sectors or geographies are facing the most pressure?A: If you look at almost on an all India basis, we see in every state, there has been a little pressure on cash flow, and the segment that we work with is all earn-and-pay segments. The utility vehicles, tractors that we finance, all of them, are deployed for commercial use and the earnings out of that are used for repayment of installment. The overall activity levels have been pretty low across the country and also the farm sector has not been performing well. If you add the two together, the cash flows for these customers remain pressurised. What used to be a monthly instalment payment and if you look at almost all our segment, it is a monthly instalment schemes for them. They are not earning enough possibly to service a loan on a monthly basis and that builds up a little overdue, while the customers are servicing the contract. It is very important to note that even though we may have a higher level of NPLs or collection deficiencies, the customers are able to service loans on a monthly basis, but not able to clear the built up over-dues. I would think that it is not a particular state or a particular segment. The pressure is overall there across the country, which is putting pressure on the customer cash flows.Ekta: You spoke about unseasonal rains and the impact on the numbers but how are the collections and disbursements shaping up in the context of the monsoon? How has it or will it impact your business? A: If you look at June, the monsoon was pretty good. There was a delay or stretch that July had a dry spell. However, the last about week or so once again July has also got decent rains. So, we expect that as we end the season it should end up definitely above average which means close to normal kind of a situation. We believe that the rural sentiments will change around this time, which means the festival season is expected to be much better than what we have seen in the last two quarters. So, I would expect from festival season which is commencing sometime September upwards, one would start seeing corrections in this market. Ekta: For FY16, how are you placed in terms of the gross NPLs especially if you are factoring in a possible shift to 120-150 days recognition?A: As far as FY16 is concerned, 150 days is the requirement and we are already towards that. We are already 150; we are compliant. What we plan to do though is that we will look at the progress going forward and start preparing ourselves in advance for FY17. So, we will take a view as the quarter passes by as to how we want to prepare ourselves about it. However, as far as FY16 by itself is concerned, we believe and as I said post monsoon, from the festival season we do expect sentiments will change. We expect things to start improving sometime from September onwards; it is our forecast.