Volatility Riddled Mahindra Finance Tries To Turn The Corner

For the full year, Mahindra Finance reported a 63% drop in profit after tax, while for the fourth-quarter profit fell 32%. Disbursements were down 41% over the year and 15% in the last quarter. Disbursements fell 5% between the third and fourth quarters as well, suggesting that even as the economy recovered, Mahindra Finance saw lingering weakness. Moreover, it had to step up provisions against an elevated level of bad loans.

“Through most of last year, we saw disruptions across auto manufacturers. The reasons could be Covid-related problems at manufacturing facilities or even supply chain problems,” said Ramesh Iyer, vice chairman and managing director, Mahindra Finance. “This impacted the availability of vehicles for our borrowers and also impacted our disbursements during the year.”

According to Iyer, if the manufacturing problems weren’t there, the company could have easily financed at least 20,000 more vehicles, which would have pushed up disbursements. Nearly 45% of Mahindra Finance’s assets under management come through the financing of parent Mahindra & Mahindra’s vehicles.

The lender lost market share across segments with supply issues at parent firm M&M impacting disbursements across the tractor and utility vehicle segments, pointed out brokerage house Nirmal Bang Institutional Equities in a report this week.

Kunal Shah, a research analyst at ICICI Securities, said despite a strong presence in rural and semi-urban areas, Mahindra Finance isn’t benefiting from buoyancy in activity levels. “It’s consciously going slow in tractors (losing market share), supply-side constraints have impacted utility vehicle sales and medium and heavy commercial vehicle demand outside of large fleet operators is muted,” Shah said in a report dated April 25.

Asset Quality Troubles Persist

But Mahindra Finance’s troubles pre-date the pandemic and a persisting pain point for it has been asset quality.

The company’s gross non-performing assets ratio has swung from a low of 3% in FY12 to a peak of 10% as of December 2020 before easing marginally to 9% at the end of the March quarter. Bad loans at the lender were elevated even before the pandemic hit.

Iyer blames the poor asset quality performance on macroeconomic conditions.

“If you see between 2014-2020, we have probably had one good year where things were looking good. In the interim, though the company has been making due recoveries on these loans, wherever possible,” he said. “We have also written off accounts to clean up the balance sheet, in cases where we were sure that the borrower is unlikely to pay back.”

A majority of defaults in its portfolio are “circumstantial” in nature, Iyer said.

Until the third quarter of FY21, Mahindra Finance held modest provisions against bad loans with a coverage ratio of 36%. In the January-March quarter, it increased provisions by Rs 1,320 crore to bring the net NPA ratio down to 4%. It also wrote off loans worth Rs 630 crore to clean up its balance sheet.

“In accordance with the regulatory expectation of the Reserve Bank of India to bring down the net NPA ratio below 4%, which management has agreed with, the Company, has recorded an additional provision of Rs.1,320 crores during the quarter on Stage 3 loans,” the lender said in the notes accompanying its earnings.

But even now the pain may not be over, Iyer admits.

“I think the first two quarters of this year are going to be very challenging. Given that the widespread of the pandemic where it has gone deeper and the (dampened) sentiments of the consumer and employees working out there, we have to recognise and accept that we are going to have to live with this,” Iyer said.

Why The Volatility?

A question that must be asked is why the volatility. Over the years, Mahindra Finance has tried to diversify its loan book, presumably in the hope of more stable growth.

For instance, since the financial year ended March 2009, Mahindra Finance has seen its tractor finance portfolio reduce from 25% of the assets under management to about 17% as of March 2021. The share of utility vehicles, other auto financing businesses, as well as commercial vehicle and commercial equipment financing, has increased.

But why has the financier not seen the benefits of a more diversified portfolio? Once again, Iyer blames timing and economic conditions.

The company has always wanted to be a multi-channel lender in the vehicle finance market, said Iyer. The company started extending more commercial vehicle and commercial equipment loans in 2012 and 2013, in a bid to finance infrastructure development in rural and semi-urban centres, he recalled. But the timing was wrong. “Our foray into CV/CE financing was followed immediately by various problems,” Iyer said. “Mining projects were being cancelled, road projects were being shut down, demonetisation was affecting borrowers and we also had bad monsoons for a couple of years in different states.”

The situation is different now, Iyer said. Mining contracts are once again being extended to contractors and road projects are set to restart once the Covid-19 situation normalises across the country. Besides the monsoon is expected to be above average. This is likely to boost Mahindra Finance’s businesses, Iyer said.

Along the way, there were other bets that went wrong. Mahindra Finance got into taxi financing. But the business came under stress when cab aggregators like Uber and Ola started cutting back on commissions to drivers, said Iyer. The Covid crisis made things worse. This business is likely to only return to normalcy in about a year and growth in the segment is likely to be muted, Iyer said.

The lender was also attracted to rural housing finance, a business that is housed in a separate subsidiary. Here too, asset quality has remained a trouble spot.

As of March 31, Mahindra Rural Housing Finance, a subsidiary of Mahindra Finance, had outstanding loans worth Rs 7,128 crore, down 9.4% year-on-year. Its net profit stood at Rs 35 crore for the three months ended March 31, 2021, compared with Rs 1 crore a year ago. The company’s gross NPA ratio was at 13.16% at the end of the fourth quarter, compared with 14.87% a quarter ago.

Turning The Corner?

Iyer, who has been heading Mahindra Finance since 2001, remains hopeful that a turn in the road is around the corner. In the quarter ended March, Mahindra Finance added 150 new branches in semi-urban and rural centres, which will help improve its network, he said.

“We’re also engaging with our existing customers and through them we are generating a lot of volumes for pre-owned vehicles and that’s going to be a growth engine for us,” he said. Apart from this, the company is also creating a separate fintech unit, which will help finance personal loans, consumer durable loans and two-wheelers, Iyer said.

Analysts aren’t convinced that any of this will lead to a quick turnaround.

Shah of ICICI Securities sees vulnerable segments such as cab aggregators, school bus, hotels and tourism, as well as heavy commercial vehicles remaining a point of strain. While the entry into digital consumer lending is positive, executions remains key given the less-secured/unsecured nature of lending to borrowers with no formal source of income and high dependence on the agricultural and rural economy, said Nirmal Bang in its report.

Iyer seems unfazed and is relying on an improving economy, a hope that is once again looking shaky amid a second wave of the pandemic.

“We’re all expecting the situation will improve by mid-May and by the second quarter this year, things will start looking up again,” he said.