In the first half of 2019-20, the liquidity crisis hovering over the non-banking finance companies (NBFCs) in India reached the doorsteps of M&M Financial. The NBFC arm of automobile major M&M Group — which focuses on vehicles, equipment, and SME financing in rural and semi-urban areas saw profits plunge in both the first two quarters. Growth slowed in the face of poor consumer sentiment even as the cost of funds went up.
The scrip plunged 10.5% on a single day after the first quarter results and analysts pointed out how the business model of the NBFC was dependant on the auto industry and the vagaries of the agricultural cycles. M&M Financial, among the top three in vehicle financing in India with a loan book exceeding Rs 70,000 crore, pushed hard on the used-vehicle financing pedal as a first step. And then it decided to evolve its business model, offer new products for new customers along with building a digital access layer. The NBFC is moving into financing consumer durables and personal loans that its customers might need. Its housing finance subsidiary, which only gave small-ticket loans for home extensions and has a loan book of Rs 8,000 crore, will now offer to finance affordable homes too.
M&M Finance MD Ramesh Iyer says the consumer durables and personal loans will grow to a loan book of Rs 10,000 crore in two years, while the affordable housing book would grow to around Rs 2,500 crore.
Iyer tells ET Magazine he has seen the profile of his customers slowly changing and becoming younger.
The farmer who would buy a tractor at the age of 40-45 was now doing so at 30-35. The car buyer was now even younger at 25-35 years from 35-plus earlier. “Customers were increasingly asking for loans to buy consumer durables or loans to meet shortterm business or personal needs. And the customer was more aware of options, ready to hunt for a better price or interest rate. We started asking ourselves how do we meet the demands of this new customer?”
While trying to broaden the range of products, Iyer and his team decided to build a layer of digital access that would ride on the NBFC’s physical presence of 1,500 branches. “We had to be phygital,” Iyer says. A completely digital strategy is not feasible in rural areas, he says. The first step is to make it easier for an existing customer to access another product, be it a loan or insurance offering. M&M’s digital platform will allow a customer to seek loans from his own home through an app or through the website. The company has a 20 member team working on an artificial intelligence platform that would be used to offer products on the basis of metrics such as repayment record and credit score. This would complement the physical presence of the branch network, which still depends on personally assessing a customer and customising products for agricultural cycle-led business models.
In a development last week that further helps diversify the loan book, M&M Financial got an investment of $200 million from the World Bank Group’s International Finance Corporation, half of which will be dedicated to funding women-led MSMEs.
M&M Financial says even otherwise, it was adequately funded. Iyer says: “The liquidity crunch never affected our money supply as we were always able to raise money. But the cost of funds went up by 100-150 basis points since the third quarter of FY19. Customer sentiments were also low since January 2019. Add to this the fact that this is the first year of reporting numbers under the new accounting standards, IND AS.”
Let us take a look at the numbers now. While consolidated total income had grown from Rs 2,315 crore for the first quarter of 2018-19 to Rs 2,851.70 in Q1 of 2019-20, the reported profit after tax dropped from Rs 322.27 crore to Rs 108.46 crore in the same period. On July 24, a day after the results were announced, the M&M Financial stock shed 10.5% to close at Rs 304.35.
Edelweiss Securities analysts had said on July 23 that the results were disappointing, though the first quarter is usually soft for the NBFC sector. “MMFSL’s business model is directly linked to demand for underlying auto segments, hence earnings will be subject to the seasonality and cyclicality of the same,” they added. Expansion of footprint by other NBFCs and a rural slowdown would also affect it. Edelweiss maintained a buy but revised the target price from Rs 518 to Rs 390.
In the July-September quarter of FY20 profit more than doubled to Rs 263.6 crore quarter on quarter, but year-on-year net profit was still down by 39%, from the Rs 435 crore recorded in the second quarter of 2018-19. On October 23, Edelweiss revised the stock target price to Rs 397, and said: “With high-cost borrowing retiring & M&M Financial Services’ pricing power, we anticipate improvement to play through.” The scrip closed at Rs 327.60 on December 6. Slowed growth remains a challenge. Iyer points out that from a 20% growth in business in the festive season of 2018, it is now at a low of 5%.
Iyer says the NBFC has made other changes. It has virtually stopped lending to smaller NBFCs. The shortterm money raised through commercial paper have come down to 5-7% of its borrowings from 12-15%. Cost of funds has declined to around 8% from 9.5% last year. Fixed deposits have grown from 7-8% to around 15% of its portfolio. The NBFC is also open to acquisitions — a portfolio buy being the preferred option, rather than buying out another NBFC. All options for growth seem to be on the table.