India's auto industry is going through crisis amid a sharp slowdown in economic growth. High interest rates have also hit the sector hard. Not surprisingly, commercial vehicles sales dropped around 20 per cent this year. Ramesh Iyer, managing director of auto finance company M&M Financial spoke to NDTV about the prospects of the industry in 2014.
Edited excerpts:
What are M&M Financial's business prospects in 2014?
We will continue to follow our strategy of going deeper into the rural market and we believe that India rural story will continue to do well. So we are opening more branches, we are going even deeper.
What is your target growth rate?
I don't want to put a number out to that but clearly it can be seen that every manufacturer for their growth is looking at rural market, so that is going to be one major growth driver. Two, we have got into financing of second hand vehicles and we do see that's another very large opportunity because we can see people graduating from a two-wheeler to a four-wheeler. The third initiative is that we have been servicing close to 2.5 million customers across 200,000 villages of the country and we want to use them as our ambassadors to increase our customers.
What about returns?
I don't think there is going to be any pressure on asset size. We don't see any pressure on out net interest margins yet. Net interest margin is of two components-- what is our borrowing cost and what are our overall yields. And as I said as we get into more of pre-owned vehicle financing that only improves the margins further. As far ROA is concerned that is the outcome of how many times you have leveraged your capital and we have stayed around five, five-and-a-half at the best in the past.
Our entire product designing is based on customers' needs and that is what helps maintain the margin, maintain the quality, bring down the cost of operation and therefore protect the return on assets.
What are you expansion plans?
We covered the district headquarter earlier and through them covered villages and that is why today we run close to 700 branches. But we see that if today we are covering only 200,000 villages while India has 600,000 villages. So the scope for growth for us is to cover the other 400,000 villages. We may take another 3-4 year to cover another 200,000 villages.
Hence our next expansion plan is to set up branches in the villages; from a village we would cover a cluster of 5-10 villages. We would open close to 50 branches in next six months or so. That's going to be the direction we will take and are targeting to cover at least 150,000-200,000 villages in next 3-4 years.
After withdrawing from banking license, where will be the focus now?
We are okay with the current capital adequacy of about 18 per cent that we have, it's good enough for us to see through the 2014. So in somewhere in the middle of financial year 2014-15, we would once more access the capital market. Otherwise we are comfortable.
What are your plans to foray into new segments?
We got into heavy commercial vehicles market 18 months back, unfortunately the industry wasn't doing well so we went slow on this. We are not a very significant player in this segment. We are largely focusing on LCVs and pick-ups and that sort of range. But our belief is that commercial vehicles is a segment which will bounce back. And that will a good growth story for us. When we get into Heavy commercial vehicle we would also participate in construction equipment segment though not the heavy ones but the small and mid-sized ones. And also we are a very small player in 2nd hand financing, about 7-10 per cent of our balance sheet comes from it. We expect it to grow 10-15 per cent even in our growth balance sheet.
What are the key growth drivers?
Utility segment of the Mahindra range of vehicles, the tractor and Maruti cars are our mature portfolios where we have a very significant volume. So there the growth would come from the absolute numbers of the manufacturer and a little of market share increase that we will drive from these markets. Apart from this we will look at cars beyond Maruti, LCV and second hand financing for growth. Also by the time if heavy vehicle industry shows some change then we would also participate.
What are the prospects of another rate hike?
If economy revives then agricultural output would be very good in the coming year and we do anticipate good participation form that sector. And we continue to believe that interest rates must come off otherwise it is going to be additional burden on borrowers and buyers of vehicles. And that could be reason why the buying is little low presently. If the rates come off the industry would come off.
What are your thoughts on policy change?
One thing under discussion is the relocation of securitizations roles which was revised two months back. And securitization has been a good liquidity support as far as NBFCs are concerned but it also has been a good support for banking segment for buying priority sector assets form NBFCs. So we would want a revision in the securitization.
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