See growth in pre-owned vehicle segment, steady margins: M&M Fin

Accelerated growth will come from car and pre-owned vehicle segments, said Ramesh Iyer, Vice-Chairman and Managing Director, M&M Financial Services, adding, there was no pressure on the company’s margins.

Speaking to CNBC-TV18 Iyer said sentiments have improved significantly in rural India post demonetisation lows and things will get better going forward.

A good crop season this fiscal, after two years of drought-like situation, has led to return of farm cash flows. However, collections remained low due to demonetisation, he cautioned. The company is focussing more on recoveries rather than disbursements, he noted.

M&M Financial Services reported its first-ever quarterly net loss at Rs 15.6 crore for the quarter ended December 2016.

Below is the verbatim transcript of Ramesh Iyer’s interview to Latha Venkatesh & Anuj Singhal on CNBC-TV18.

Anuj: Last quarter was loss making for you, I am sure demonetisation would have had an impact but have things started to look up in this quarter?

A: Even last quarter it is important to look at the quarter into three different months, you must look at it as October, November and December. October was a great month from a volume perspective the business was good. November after the first 8 days was good then all of us know what happened then on. December also showed some recovery and we do see that sentiments have returned back to some kind of a normalcy in rural. We do expect good things from hereon.

Latha: At the analyst meet after the results you told us that Rs 659 crore of non-performing loans (NPLs) were not recognised because RBI gave you that permission of two more months. How have these since performed? Are you largely seeing that money being paid up?

A: If you look at it the crop was good, but the money didn’t come in November and December and that got delayed to this quarter and that is a reason we also went ahead taking that benefit. As otherwise we would not have wanted to but we knew for a fact that the cash flows has got delayed and we have seen that the at least the farm cash flows have returned. It is important to understand two major states like Maharashtra and Madhya Pradesh which went through poor monsoon two years back to back are actually having too good crops. So, the money is returning back, at least the farm cash flow is pretty good.

Latha: Investor shouldn’t worry about Rs 659 crore, it could be a smaller figure?

A: It is basically because it is just shifting of cash flow from a quarter three to quarter four kind of a situation.

Latha: Is it the entire amount that will be the big worry for investors isn’t it?

A: I think most of the money will come back, even if you look at from that Rs 659 crore I would imagine upwards of 60 percent or plus will be from tractor cash flow – that is one. Second is I think it is also important to understand that while there are multiple cash flows that come into the rural market but the sentiments and the larger chunk of the cash flow is farm dependent. So, if the yields are good the cash flow is returning back. I think we have every reasons to believe that most of it would get corrected as we go along.

Anuj: If we look at your numbers what really stood out for me was commercial vehicles financing. The kind of growth that you saw what led to this kind of growth because that would mean quite a big thing for the economy as well or do you think it was a bit of a one off?

A: I don’t think our numbers are an indication really from a commercial vehicle perspective we have a small base. We are not a significant player when it comes to commercial vehicle. Nevertheless and in our case the commercial vehicle also has a mix of light commercial vehicle (LCV). So, I think it is not really have commercial vehicle per se, but yes we had a decent growth in that segment one as I said out of the low base but also because of the LCV kind of vehicle did well for us in some of these pockets. As a pan India we do get the benefit and all put together is really the growth rate out there.

Latha: What would you say will be the growth of loans in the current quarter itself has loan growth broadly picked up?

A: If you look at and I said that in the third quarter itself we had a good growth in spite of demonetisation impact beyond November 8th, but October by itself was upward of 20-22 percent growth for us so as of date if we speak even when you looked at December 31st number we had a growth rate of 12-13 percent plus. We do expect that this kind of growth rate should continue. We always get the benefit of a deeper penetration with multi product approach and therefore everyone trying to sell some small number out there and we get a benefit of that. I don’t think our real problem is on the asset side growth rate. We have been going through tough times and as far as the rural cash flows are concerned and the focus was more on recovery rather than really worrying so much on the disbursements and we don’t see that as a challenge.

Latha: Some analyst report worried about two things – one that your net income that is your net interest income (NII) plus other income was up only 2.7 percent year-on-year (YoY) and actually down 5.9 percent quarter-on-quarter (QoQ) . I can understand the QoQ impact, but even YoY it was up only 2.7 percent. Also you expenses were higher? Operating expenses went up by 23-24 percent. Are both these now showing the opposite direction can we see more NII growth and why did this happen this operating expense?

A: First is NII, I think if you look at from our revenues we knock off the income reversal arising out of the non-performing assets (NPA). So, it is not a shrinkage of the margin arising out of the lending rate minus the borrowing cost. It is actually the net income after adjusting for the income reversals of the NPAs. So, no sooner you start recovering back from the NPL accounts you will start seeing a direct improvement to the net interest margins (NIMs) which is very obvious. So, that is no pressure because I don’t think our lending rates have come down and in fact we get some marginal benefits because of the current borrowing cost going down.

So far as expenses are concerned I think it is a productivity ratio out there because for the same effort you actually are recovering less. We have added people and I want to be absolutely clear that we do have a very clear view on how we look at the future going forward. So we have added branches and we have added people and they are not producing enough because of the current market conditions. But, I don’t think we want to wait until thinks improve and then add capacities. So, in a way we are running a little excess capacity when it comes to our penetration and people are concerned and we would very strongly think that the productivity will kick in as volumes come in. We may not add to cost as we start improving from there.

Latha: Finally what kind of loan growth may you end the year with and which may be the verticals that lead it?

A: I may not want to put a number out. We are not losing market share in any product is something that I can confirm, in fact we are gaining some market share in some of the product. Also that we are very large players when it comes to Maruti range of vehicles and Maruti doing well we getting the benefit clearly. As far as the verticals are concerned I think the car segment is doing well for us the pre-owned segment I am reasonably sure after the demonetisation where customer to customer selling or lot of wholesale purchases, lot of cheque payments will all happen because the brokers in between were buying vehicles on cash and that has gone a little slow. So, pre-owned vehicle will be one segment which will give us some good benefit.

Commercial vehicle were low based, we do expect that is one another growth area for us. We are retaining or slightly growing the market share when it comes to the Mahindra range of vehicles, tractors etc. So, I would think there will be growth coming from almost all product but accelerated growth would be from the car segment as well as the pre-owned vehicle segment.

Latha: How may you end the year in terms of GNPA, you have just about what 40 days or not even 40 days, 30 days left to year end. What might you end the year with in terms of GNPAs and therefore will this provision problem persist for a couple of quarters more?

A: Two things will happen, one is we have already moved to 120 days a year before RBI wanted us to, so therefore when you compare any number with a previous year we must always keep this mind that we are already at 120 days levels. I think the 90 days will kick in next year. As a company we have always taken a view of trying to be as advance as possible on that front. So, therefore the regulatory impact will possibly continue for some more time.

Fourth quarter normally has been one of our best quarter historically any year you look at us. The cash flows are good out there. The crop money comes in, the wedding season all of the activities are positive sentiments out there, so to that extent whatever benefit that we get out of the cash flow improvement we will get, but we shouldn’t forget that the regulatory change will kick in. The one interesting figure of us you must look at, we are already carrying upward of Rs 800 crore excess provision over the RBI requirements. Excess would mean we have kind of made accelerated provision as compared to the requirement. So, that is a very large number of reserves that we carry out there.

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