Chennai: Sundaram Finance Ltd (SFL), the Chennai- based non-banking financial company, or NBFC, has interests in mutual funds, insurance, home loans as well as car and commercial vehicles finance.
Almost two-thirds of its lending is to buyers of commercial vehicles (CV), a segment that has witnessed a slowdown in recent past. If the CV segment slows during this year, then SFL will look at reorienting its strategy and try to rebalance its portfolio.
Growth mode: Sundaram Finance managing director T.T. Srinivasaraghavan says the firm will not enter life insurance business
The company ended 2007-08 with a total consolidated income of Rs1,471.21 crore and net profit of Rs 252.16 crore. Its total loan disbursal stood at Rs5,109 crore. It recently announced a 1:1 bonus for its shareholders. T.T. Srinivasaraghavan, managing director of SFL, spoke to Mint about the company’s plans and prospects for the industry. Edited excerpts:
Everyone says we are heading for a slowdown. Are you worried?
After four years of 9%-plus growth, (if) we drop to, say, even 7-7.5%, I don’t think there is anything to panic. We have to readjust, recalibrate, but compared to the rest of the world, I think 7.5% is brilliant. The slowdown is already on.
What strategy are you adapting to tackle the current situation?
Our strategy has always been profitable growth. We don’t measure ourselves by merely the top line. If the CV segment slows down, then it is a question of rebalancing our portfolio in terms of increasing the mix of car (loans) business, construction equipment business...basically, reallocating resources. If we can’t get profitable growth, we could even go slow on growth.
Specifically, what does the slowdown in the CV business do to SFL?
We should see things in perspective. The last 4-5 years have been years of high growth and this industry has historically been cyclical in nature. So a slowdown was anticipated. In the next 12-18 months, once capacity readjusts, we will get back into growth mode.
In 2007-08, SFL bucked the larger industry-wide trend and grew. How?
Last year, we had expanded our network significantly by getting into newer markets. This year we will add another 100 more locations. Also some of (our) competitors may have had slowed down a little bit.
Isn’t competition in the business intense? ICICI Bank Ltd and Shriram Finance are both very aggressive players in this business.
Competition is essentially driven, for the most part, by pricing, right? We don’t play the rate war. Typically, our rates tend to be a little higher than our competitors. Our differentiation is the service levels that we offer, the personalized service, our direct touch with the customers. We are one of the very few companies who go direct to customers. We don’t operate through intermediaries. We do face competition from biggies like ICICI Bank. They are serious competitors but as I said, it is a large market, so there is room for a number of players.
What’s the current mix in your portfolio?
In terms of (lending) mix, we are approximately 60% commercial vehicles, 25% motor cars and about 10% construction equipment and the other 5% is other equipment. But, this is the broad mix. From year to year, this can change. Some recalibration is possible. If CV slows down this year, then 60% might drop to 55%, cars may grow up a little bit.
How much funds are you looking to mobilize in the current year?
In terms of funds, our total liabilities are of the order of Rs6,000 crore across various maturities. Typically, if you look at it, about one-third of it or more than that will come up for maturity. We have a broad, wide basket of funding. We have a mix of debentures, fixed deposits and bank borrowings. We do a little bit of securitization, sell down of assets. Our asset liability management is monitored very tightly.
Do you expect the cost of funds to go up?
Well, I expect that it will go up. By how much, it is a little early to tell.
Do you also see a rise in defaults because of an increase in finance costs?
Cost of money is one thing, defaults is another. Default is more a function of what is going to happen to the cash flows in the system. So if there is an overall slowing of the economy and because of that, ....certain industries like users of truck capacities...start getting squeezed and, in turn, they start defaulting on their payments to truck operators... Even then, delays, not defaults, could go up. The sad part is that interest rates are the favourite and easiest whipping boy for everyone. The reality is when everything is on a roll, people don’t mind—regardless of interest rates, they will buy. But when sentiment turns negative, everything looks like an impediment. A lot depends on perception and sentiment.
This would be the first full year of operations for the Sundaram BNP Paribas Home Finance joint venture. How would you like to differentiate yourself in the market?
Our partner brings certain product expertise because it is a mortgage lender of some size and repute in Europe. We are working with them to see if we can bring in new products. Once restrictions on external commercial borrowings go we will be able to tap into a much larger resource network internationally. (We will focus on the) retail home loan segment. There is a wide array of products in the international market which are currently not available in India. Some of them are suitable for the Indian market; we will introduce them maybe by the end of this year.
While most of your subsidiaries have had foreign/private equity participation, SFL is yet to see any such participation.
I expect that it will remain that way for all time. It is a conscious decision. There is no specific reason to go down that route. There is no need, pressure or compulsion to go down that route.
After 2009, if RBI (Reserve Bank of India) permits, would you look at the option of converting yourself into a bank?
No, no thoughts in that direction. I think we are happy being who we are. Basically, the belief is that “do what you do best”. We don’t have banking ambitions.
Life insurance business is the only business in which you do not have a direct presence. Any plans on that front?
I don’t see that happening. It is not an area where we have expertise. Non-life insurance is basically our roots. We started life as the subsidiary of an insurance company. Though the business has changed, there is a natural affinity for it. Given that we are an auto-focused, retail (finance)-focused finance company, the fit with non-life is very good. We don’t have that kind of fit as far as the life (insurance) business is concerned. The life (insurance) business is a much longer term, longer gestation and highly capital-intensive.
We can, but we are able to achieve, more or less, the (same) objective by distributing products of two of the best known names in the business—Life Insurance Corp. (LIC) and SBI Life.