We are not much worried about this small raise but clearly the trend is that rate hikes will continue and the accumulated hike may get bigger, says Ramesh Iyer, MD, M&M Financial. Iyer tells ET Now that operating costs normally do not dent volumes. It is the price increase of the vehicle which sometimes delays buying decisions.
How much does the rate hike by RBI impact your business?
It is no that every time there is a hike borrowing cost, you pass it on to consumers but then that tends to accumulate and ultimately you have to pass it on.
I would think that to start with, we may have to accept this rate increase and then eventually pass it on to the consumers. The same is true when a rate cut happens. I do not think we are overly worried about this small raise but clearly the trend is that rate hikes will continue and will have an impact while acquiring assets.
You have become the third largest agri equipment lender in the US. Where do you see the US business headed from here?
About a decade back, we set up this business jointly with DLL in US for financing tractors. We have spread across the country and the business now has more than $1 billion as a balance sheet. We believe the next $1 billion could happen in less time than it took to reach the first . Even our own tractor business is accelerating and therefore the next $1 billion could come much faster.
Second, it has been a profitable venture from a very early stage as the partner brings in funds at an affordable price and then we have the process to deliver services to the dealers and the consumers, using our experiences of running businesses in this market. Put this two together and we have been running a very profitable business. The next five years would be even more exciting with our business growing further.
JM Financial has a buy on your stock with a target of Rs 625 and the peg there is really the sustained recovery in the rural economy that we are experiencing. Given the monsoon forecast, would this be perhaps a stronger year in terms of demand just like the last two seasons?
The answer is yes. If you look at our business for the two years barring the last one year, we went through difficult times and the reasons were poor monsoon and the lack of activity in rural India. It is expected to be better on both counts this year. In the year gone by we saw improvement in every quarter in terms of growth in business as well as in the asset quality improvement. We believe the trend will continue.
The one concern is banks have already started hiking the MCLR. We saw that play out even before the policy came out. How do you expect to protect your margins and spreads going forward? Also, how much will your cost increase thereby?
I said right at the beginning that we will not want to immediately pass on the 25 bps increase but if we were to look at next six months plus, the overall cost increase will be a little upward of 40 bps and we have once corrected our lending rate already.
It is also important to understand that for a vehicle of Rs 5,00,000, a half a percent increase is about Rs 2,500-3,000 more. The dealer, the OEM, the finance company definitely come together and understand how much to pass on, what needs to be absorbed. So. I do not think the cost increase is all falling on just the financials. It sometimes gets distributed between the dealer, OEM and the financial as well.
My personal view is that operating cost normally does not dent the volumes. It is the price increase of the vehicle which sometimes delays buying decisions.
Do you think that the concerns regarding asset quality are likely to bottom out soon? What would this rising interest rate environment mean for disbursements and AUM growth? Would you be able to sustain more than 15% AUM growth?
The demand is high, footfalls at the dealerships are high and we are not seeing too much of competition. We are present in 330,000 villages and we are a multi product company. A little increase in the borrowing cost we can always pass on or co-share with other partners. Therefore, we do not see any pressure on our disbursements as far as the asset side is concerned.
As far as asset quality is concerned, over last four quarters, we have seen consequential improvement over the previous quarter in spite of moving to 90 days. We believe the worst is behind us as far as asset quality is concerned.
The sentiments are positive, previous season yields were good, support prices has been average plus and this season monsoon is projected to be good. Overall, the cash flow in the rural market would remain positive.