EXCLUSIVE: M&M Financial Managing Director gets candid about the rights issue, the bleak prospects for this year and why there should be no more loan moratorium

• M&M Financial Services is hitting the market with a ₹3,089 crore rights issue, today.
• Business Insider caught up with the Vice Chairman and Managing Director Ramesh Iyer in an exclusive chat and posed the following questions.

M&M Financial Services, a non-banking finance company with a market capitalisation of ₹15,000 crore (over $2 billion), is hitting the market with a ₹3,089 crore rights issue.

Existing shareholders will get rights to buy additional shares in the company at a cost of ₹50 a piece, a discount to the current market rate of a little less than ₹130. This kind of fundraising is usually undertaken to shore up capital and increase the net worth of the company.

However, this says a lot about what the company believes are the prospects in the near term. Business Insider caught up with the Vice Chairman and Managing Director Ramesh Iyer in an exclusive chat and posed the following questions.

You can watch the entire interview here.


These are the edited transcripts of the interview.

What do you make of the market reaction that the stocks have been tumbling down for the past few days? Why aren't investors excited about this?

So, I am not too sure the market going down has anything to do with the Rights (issue). I think there is mixed news coming around on what's happening in rural (areas), how the market is panning out, if there's going to be a next moratorium, right? And, if the moratorium was not to be there, how do the NPA’s and the industries start to perform? So, I think it's all at the back of the performance and not anything to do with the Rights Issue.

What is the goal of the rights issue?

So clearly it boosts the capital base but the overall money is about ₹3,100 crore, which is at the current level equal to one-months disbursement. So, don't look at it from a cash flow perspective, look it from a cash boost perspective. Straight away from the 15-17% capital adequacy you go to 19-20% adequacy level, which gives you phenomenal leverage capital and gives you room space for growth in future. And, for some reason, you know the market conditions turn negative because of COVID. And (if) COVID turns much larger than anybody imagines, then it also addresses your insolvency issues and you remain absolutely strong.

So it's a stitch in time or preparing for the worst and aiming for the best?

I think when we discussed the need for capital and Rights Issue as a format in April, obviously, we thought we should prepare for the worst. Because you know the lockdown has just begun and nobody had a clue on how long it will stretch and the moratorium got announced, and you know everything is going negative, no sales happening. That's why everyone wanted to be prepared for the future. As came May and June, and then we started seeing the phenomenal revival of the rural market. The pitch turned to that if things are getting better, you will have a phenomenal opportunity of taking the growth of 35% (YoY), and that, again, will need capital.

So you are gunning or 35% growth again this year?

Not this year, this year is out of the question. I think nobody will talk about growth this year. I think everybody should look at … if it's beginning to happen. If you look at March volumes, it will be at 50-60% of the previous year. Because you have already lost a quarter without doing much in the market. And, July and August are not going to be kind of very aggressive. Anything that will happen will happen post-October. Any growth anyone is taking is I guess 2021, 2022, 2023 kind of a story. I think FY21 is gone, you will have much smaller volumes, and all of ourselves will fight to keep ourselves afloat.

Let's talk about cost-cutting and the changes you are making?

Cost of funds has definitely come down as you said. And, you know, even pre-COVID, if you look at our Q2, Q3 last year also. We have said that we will also focus on various cost initiatives, and we look at line item wise. For a company like ours, we will not have only one line item completely cut by, and that will save a lot of costs.

So are you shutting down branches?

No, we are not. So what we are actually doing is we have looked at each line. For example, we looked at the branch rent rationalising. So we renegotiated rent, we have moved to new places and all kinds of stuff. The second is all the peripherals attached to the branch like securities or weather BPO services, below the line advertising and funding exercises, the travelling and conveyance expenses. So if you use a little more technology and digital, you will be able to bring down conveyance cost. On the people front, our belief has been very different and very strong. We think that if at all you are talking of people cost that should be the last to look at but can't be the starting point.

We have cumulatively 2 million customers from whom we have to recover money. So you need people for that, you may not grow that year, but you need people for what you have done already. And, branches are on that also. Each branch will have 3000-4000 customers to manage. You can't just shut a branch looking at some few thousand rupee cost. Once the market revives, some of those expenses will return. But our own understanding is that at least about 20% of the expenses come down from the previous year, even if things were to return to absolute normalcy.

Your NPAs level is around 10%. Is that correct and if that is correct, where do you see this by the end of March?

So two things have happened while the gross has been a little higher than March, but the net has been lower than March. So we have taken a little aggressive position based on the geographies and based on certain product behaviours and segments, there have been some higher provisions. So as we progress you the next six months, which is normally the good six months, we would not see a decline in the gross NPA, and we will maintain our stance on aggressive provisions. And, we will have a very close look at understanding what's happening in the market. And, if we start seeing things are not improving as we think, then we may take higher provision, whichever is necessary.

COVID is now spreading beyond cities, is that something you are taking into account yet?

I think it is important to look at rural from a very different perspective. We are seeing UP, we are seeing cases, we are seeing Bihar, we are seeing cases. But is it concentrated at one place, no, unlike major cities where it is concentrated in numbers. In rural it's a very wide number like in some villages 2 cases and in some other villages some few cases, so it does not affect the overall economic activity of that place. So even as we speak and we are also seeing this number going up in different cities, but that's not affecting the local activity completely, because it's not concentrated and the activities are spread across like farming, that is not going to be affected even if some cases are there.

What has been the trend like for M&M Financial Services?

In June more than 40% of the people who opted for the moratorium have actually repaid their instalments. My understanding is you will see from the fourth quarter, i.e. January onwards or maybe for October, you will start seeing good trends but Jan onwards one can start seeing the infra cash flow coming in. And that should do good for the rural.

What have your collection trends been like?

From April to May, it was double of April. April was a disaster at 14-15%. It went to 25% or 30 in May. And went up to upwards of 77% in June. And, July good news is that as we see our numbers. It is equal or better than our June number. It's holding up very well.

Does that seem like a level that's going to continue for some time?

I think July-August enrols no major activity even in normal time, when monsoon is around the economic activity comes down. The real test will be what happens in the third quarter— post the monsoon. How does the festival season pan out - when the activity begins to happen. And when the monsoon ends, what's the outcome of the monsoon? Is the yield likely to be good? I think the third quarter will be the test, and you will start seeing post-November money will start coming in, stretching till February.

What happens if the government goes for another lockdown and another moratorium ?

What at least we see from a retail customer perspective is not all of them need a 90-day moratorium. Some of them need a restructuring of the loan because they need a smaller EMI because their income has shrunk and they are not able to repay so much, Some of them want a much extended period of debit.

Some of them want a shorter moratorium; maybe a 1-month moratorium because let's take a farmer, he may say my money is going to come in November, right, so please give me 30 or a 45-day moratorium, not a 90 day because I don't want to bear that interest.

So, if you were to take it this way then my point of view would be— restructuring would be a good approach where an institution can look at each customer and segment and then look at what is required. For example, a heavy commercial vehicle operator, 90 days may be insufficient because he may start earning only post-January or whenever because currently, he has no volumes to carry, Right? So, now you have given 90 days, he will consume that 90 days, and again he is going to be not able to pay it, once he opens up in January.

So, if you put all of this together at least at the retail level, our understanding is if you give a restructuring which is a responsibility of the company to see to whom you want to give and what kind of a restructuring you want to give and put in place an approved process by which you will be monitoring it.

But that is a risk, right?

But then, there is enough ring-fencing, they have said that freeze the accounts as of February 29, and they should be standard account on that. There should not be more than two instalments outstanding on that day, they should not already be an NPA account, so there is a very clear ring-fencing which has happened. It is then ultimately the responsibility of the organisation - whom do you give what kind of restructuring and what kind of a time frame. So, you know that's what the ask is, or a request is that if it can be considered on a restructuring basis with responsibility.

Have you made any change in the term of the assets whom you were lending to, in a post COVID scenario?

Not because of post-COVID, I think it's an outcome of an absolute volume for each product. If April was no sales month. May saw more tractors sales and less vehicle sales and June continued that way. If you look at the monthly disbursement. I think 45-50% of the disbursement went to tractors. And, the balance went to other vehicles. But on an overall, where the book is concerned, one month doesn't tell the balance.

What is your current mix like?

So about 17-18% is tractor, another 25% would be Mahindra auto parts. Then cars about 28%, then pre-owned vehicles about 10% and then small commercial vehicles and commercial vehicles all together will be 8-10%. I think SME has dropped to around 1-2%.

Is it a concern on heavy reliance on the automotive sector because of the trouble that the sector is going through?

I think that's not the right thing. It is divided between urban and rural again. I think what you don't see is an auto demand. It's not an urban phenomenon. If you talk to any OEM (original equipment makers e.g car manufacturers), they are all talking of rural revival. Dealerships have improved. Actually, the real constraint for the auto current is supply. They are not able to make vehicles available to the dealership while there is sufficient demand for small cars, pickups, small three-wheelers, this kind of product. And the inventory levels at the dealerships is at its lowest. I think if they can make sufficient vehicles available, I think there is enough demand.

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