Mumbai: Mahindra and Mahindra Financial Services Ltd (Mahindra Finance), the financial services subsidiary of Mahindra and Mahindra Ltd (M&M), India’s largest tractor and utility vehicles maker, is diversifying into asset management, loans against gold and credit for the purchase of construction equipment.
A road map: Mahindra Finance’s Ramesh Iyer says the plan to enter asset management business, finance against gold and funding purchase of construction equipment is being discussed within the group. Abhijit Bhatlekar / Mint
“We have made an application with Securities and Exchange Board of India to start an asset management company,” Ramesh Iyer, managing director, Mahindra Finance, said.
The company, which has a strong presence in semi-urban towns by virtue of funding tractors, three-wheelers and utility vehicles, and has a total of 457 branches countrywide, earned an income of Rs1,384.7 crore for the fiscal year ended 31 March, a 12.9% growth from the preceding year’s income of Rs1,226.8 crore.
In recent years, Mahindra Finance has added new businesses such as distribution of mutual fund products of asset management firms and earned an income of about Rs2 crore in fiscal 2009.
“The plan (to enter asset management business, finance against gold and funding purchase of construction equipment) is being discussed within the group and build a road map for the business,” Iyer said in an interview last week.
Extending loans against gold—which Iyer calls the “next big opportunity”—is a profitable business in southern India, with companies that are predominantly south based, such as Muthoot Finance Ltd and Manappuram General Finance and Leasing Ltd, running profitable operations in that region.
Earlier his week, Muthoot Finance announced it was opening a branch in New Jersey, US, home to a large Indian-American population.
According to a 19 August report Gold Demand Trends from the World Gold Council, India continued to lead in consumer demand for gold—both jewellery and net retail investment—at 109 tonnes for the quarter ended June. However, this was a 38% drop from the same period the previous year.
In recent years, the non-banking finance company (NBFC) of M&M has been systematically diversifying itself from a pure vehicle-finance company for in-house vehicles to extending loans to buy used as well as non-Mahindra vehicles. Mahindra Finance hopes to capitalize on the at least 800,000 customers’ data it is currently managing to gain traction in the new business segments.
For instance, about five years ago, the company through a newly instituted subsidiary entered the insurance broking business, and two years ago entered the rural housing finance market. While the businesses are still small compared with vehicle financing, the company hopes to earn sizeable fee income from them.
“We have taken credit to the last mile,” said Iyer.
The company, registered in 1995, went public in 2006, and now claims to have attained the same net worth, around Rs9,000 crore, as its parent. In addition to asset financing and gold loans, the company is also planning to enter a new area of financing construction equipment, a sector that is currently dominated by L&T Finance Ltd, a subsidiary of Larsen and Toubro Ltd, and Srei Infrastructure Finance Ltd.
“A lot of infrastructure projects are happening across the country and many of these projects are beyond the urban cities,” said Iyer, who grew the company from ground up after joining the NBFC in 1991 as its first employee.
Explaining the rationale for entering this segment, Iyer explained that their presence in smaller cities other than metros will help them scale the business faster than others.
“Our focus will be in the rural and semi-urban market, where the company has built a network of about 450 branches in 14 years,” he said.
In an SSKI Research report on the firm dated 28 July, Pathik Gandotra and Neha Agrawal of IDFC Securities Ltd wrote about the company’s muted growth in net interest income as volumes were low.
“Gross non-performing assets are up by Rs103 crore to Rs790 crore. In percentage terms, gross non-performing assets are at 9.8% stable year on year, whilst increasing by 110 basis points quarter-on-quarter. Albeit some cyclicality in recoveries, delayed payments were indicated to be the result of weak/delayed monsoons impacting customer cash flows,” they wrote immediately after the company announced its June quarter earnings. One basis point is a hundredth of a percentage point.
Iyer understands that bad loans could be a spoilsport but said he has a lid on them. To ensure that its branches are disciplined in their lending, the company has made branch accountants report directly to their regional chief accountants and not to the area manager.
“The mistakes one does through appraisals should be undone by recovery,” he said. “The net interest margin for the business is currently at 8-9%, indicating the high risk of customer profile it caters to.”