Expect good festive demand to drive growth: MMFSL

In an interview to CNBC-TV18, Ramesh Iyer, Vice Chairman & MD, M&M Financial Services spoke about the results and his outlook for the company."We do believe that with a very positive farm cash flow expectations, high yield support price to be adequate as well as the festive demand being extremely positive, we should be the beneficiary of the strategic penetration that we have created", he said.Below is the transcript of Ramesh Iyer’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Let us speak about the growth metrics. The asset under management (AUM) growth has been healthy in Q2 but topline growth was not that much. Can you tell us how you see the demand in the festive season and therefore the topline growth in the second half?A: Clearly, we had a 25 percent plus disbursement growth in this quarter, whereas the matured contracts were much lower, therefore the AUM growth has happened. So, two things happened. One, even though the disbursements were higher, the revenue from the disbursements does not come in immediately, you will start seeing the revenue come in the following quarters.Two, if you are comparing our revenue to the previous half then there is Rs 38 crore item in the revenue of the previous year, which is coming from a securitisation reversals, which is not in this first half. So, that is causing a little dip.Otherwise, the increased disbursement and increased revenue will generate increased revenue as we go along.Sonia: What has been the movement in the net interest margins (NIM) and the cost of funds? Can you give us some guidance on the cost of funds going ahead?A: We clearly see cost of funds coming down because we now have a AAA rating and we do believe that the benefit of the rating will come to us through multi-product approach that we have. The bond rates have come off and therefore, the marginal cost of borrowing for us will come down. We do believe the next two quarters will see the interest rates or the borrowing costs for us definitely will come down from all the instruments that we are participating in.So far as the growth rate is concerned, rural sentiments are extremely positive on the back of monsoon and we have seen the reflection of that in the original equipment manufacturers (OEM) volumes when it comes to tractors, when it comes to utility vehicles (UV), when it comes to cars or any of the product that gets sold in this market.Our relationship with multiple OEM is a big advantage and our deeper penetration is an advantage from which we forecast our growth. We do believe that with a very positive farm cash flow expectations, high yield support price to be adequate as well as the festive demand being extremely positive, we should be the beneficiary of the strategic penetration that we have created and the relationship that we built.Latha: That point is taken but asset quality is still very difficult. Any view on the collection efficiency ahead? Provisions also, any guidance?A: Provision increase is again caused by -- if you look at first half of last year, we were on a 135 days. We have moved to 120 days. So Rs 44 crore additional provision has come on account of our moving to 120 days.So if you were to normalise it for that then the total provision that we have in this quarter or this half is almost same as what we had previously. But more importantly, our gross NPA numbers have remained same as the first quarter -- normally, the first half is not a great half from a rural perspective. With the monsoon being good, one does expect a good farm cash flow and then the following quarters with the second crop coming in January, we very strongly think that the rural cash flows will improve and one would start seeing numbers very different from what we see at this stage.Sonia: The capital consumption has been very high quarter-on-quarter. What would be the way forward?A: One is we believe capital consumption is a good thing to have for a finance company, which means it is a resultant outcome of a growth if profits are adequate. If you look at our profits, ours kind of remains stable and once the profitability starts improving as we go along, the capital adequacy will restate itself if the past provision reversal starts happening. More importantly, the capital consumption has also happened with a 25 percent growth coming in and therefore, the AUM growing at 14 percent would have consumed about 0.5 percent capital. But we do believe that with past provision reversals happening, networth getting added back, one would see stabilisation there, but we would be very happy is capital is consumed for growth.