M&M Financial: Feelings turned positive, we’re going to have a good time, says Ramesh Iyer of M&M Fin
Lately, the corporate commentary has been that the second wave of Covid has not created the kind of havoc previously envisioned for the rural and semi-urban economy. Can you give us an idea of the market building and recovery that you are actually seeing?
The second wave of Covid hit hard in April-June. There was a 90-day lockdown. We barely worked for 15 days in the market place and so it had its own impact. But the good news is that as soon as things opened up after June 15th, we saw a very positive sentiment in the rural market.
In June, July and August we saw it both in terms of overall collection efficiency as well as product demand and the market has generally seen, even in the past, that when a disruption occurs , they dive, but as things open up, they also go up pretty quickly. A similar trend was observed here. So I agree that the feelings have turned positive, things are improving and we all pray that we don’t have a third wave. I think we’re going to have a good time.
The festival season is approaching. Could we get closer to pre-pandemic levels, if not above?
Regarding the demand for vehicles or tractors or second-hand vehicles, we see a very high attendance at dealerships. We all know vehicle availability is an issue at this point. I think the festival season until March and the second half will be very good. Even when it comes to collection efficiency, we saw a monthly improvement and activity levels increased. Of course, there are places and states where activity levels are still low, but with the monsoon turning out to be at least average, the farm’s cash flow will also be maintained after the festival. In my mind, October 3-4 until March will be a very good time.
What about your last foray into vehicle leasing and subscription under the QuickLease brand? It is a very strong business model on a global scale. How long will it take to resume in India?
Medium and large businesses, given their CTC costs, see leasing as a clear option and we think there is a good game there. Millennials will want to own a vehicle but not really own it in the sense of wanting to pay for it in full. They would prefer to use it as and when they need it. This segment of customers would like leasing to be a good option as they may not even decide what state they want to set up in etc. There are enough indicators to believe this would happen for sure.
It is also important to consider how many companies wish to go with light assets and that they would see leasing as an obvious option.
Finally, I think that as the prices go up people will want to use it and pay for it rather than own it and therefore leasing companies will become a great option to consider. Finally, with the opening of the electric vehicle segment, it will undoubtedly be a vehicle that will be in demand through leasing products. We anticipate that leasing will certainly become a very important option for various car users to consider and even in the commercial sector for that matter.
The shortage of vehicles due to semiconductor or supply constraints could be a serious drag for the next two quarters as companies told us that for the next two quarters they would not expect anything from big on demand for semiconductors. What is your point of view ?
It will surely be a shock absorber as we see an extremely high possibility of sentiment in the market there and vehicles are not available. This is going to be a drag and maybe it would be the highlight of the show, as it seems when looking at our return to the pre-Covid situation. But from a financial point of view, the volumes would undoubtedly suffer, but this means that in a way the use of the available vehicle will increase considerably and therefore the collection efficiency could improve considerably from this end, because demand is an indicator of things. return to normal and the rate of use is high. If demand is not met, the available capacity will be fully utilized. Certainly, the volumes will suffer but I imagine that the collections will improve.
What’s the biggest threat to a business with rural fintech representation?
Since the rural population looks for small loans because they have a lot of temporary needs during the year for school fees, marriages or health risks and they resort to various sources such as family and friends, local traders and pawn shops. This is where fintechs will step in and play a phenomenal role in terms of consolidating this demand using data and technology. This is a space that we have also looked at very seriously and we have already started a digital finco within MMFSL and we think it can be a tremendously important business to start with existing clients and then expand it to many. similar customers.
Given the strong rural sentiment and regardless of a very large and horrific second wave, will the tractor continue to dominate your product line in the future as well?
If you look at our book, for a very long time, tractors were around 16-18% and that would continue to be the case because it’s a product of choice for us across the country and as we all know, tractors are used both for farm as well as for all kinds of applications. This will be one of our very, very important portfolios.
You have indicated a reduction in your NPLs through improved cash flow. Can we expect an even more downtrend in the future?
Of course the answer is yes. In rural India, the second half is still much better than the first half. In the first half we had such a severe impact and that was fixed. I have said over and over again that you have to look at faults and delays as two different compartments and not confuse the two. The increase in NPA in the first quarter is caused more by delays from good customers who did not earn during this period. All of this would be corrected in the coming quarters.
Compared to what other NBFC stocks have done over the past five years, it looks like the stock has fallen short of its potential. There has been a lot of volatility. Why is this so?
In the last three or four years, rural areas have had a very good contribution of over 95%. Half of our book is rural and we are specifically in a product segment which is vehicles and tractors as a family. The segment we have chosen to work with is a earn and pay segment. They were the ones who suffered the most, but we have remained true to our fundamental strategy of bypassing this customer segment in the rural and semi-urban market. It has affected us during the Covid period, but I am reasonably sure that over the next three to four years rural is poised to expand with government attention and the opening up of rural infrastructure and l ‘agri returning to a good contribution from the agricultural cash flow side. We are reasonably sure that what you saw for us between 2010 and 2014 would be in 2024-2025.
Look at the growth in the number of tractors. Over the past six quarters, the data from Escorts, Mahindra & Mahindra and other smaller players hasn’t been bad. The CV activity has returned during the last three quarters. Why is there a lag in your business? Shouldn’t you be the primary indicator rather than the lag indicator?
Tractor sales depend on agricultural purchases and this is normally a very nationalized banking product when it comes to financing agricultural tractors. They want a five-year, seven-year or even upward look and it hasn’t normally been an NBFC game, at least not for us. For us the game has been on the contracts side because as the infra opens up we are starting to see the demand for tractors on the contract side coming in and you will see our growth coming from there.
As far as the CV segment is concerned, these are largely provided by very large fleet operators and we fund one to five truck owners. Fleet operators are not our game. We don’t have a great value proposition for fleet operators. They are looking for a very large number of vehicles. Again, this is largely a banking product so you can’t see it from our side. Demand has also been a little more urban for commercial vehicles. So put it all together and you will have an answer why M&M Finance has not shown this kind of growth trend.
Over the next three or four years, demand will come from the rural market and it will come from the subcontracting segment. It will come from those customer segments that normally start buying vehicles when that procurement segment opens up, such as coal mining or excavation or rural road projects. You will then see a clear trend for Mahindra Finance.