Rural India will be a story to watch out for over the next couple of years thanks to generous allocations being made towards development of roads coupled with the opening up of mining and coal excavation gaining ground.
According to Ramesh Iyer, VC and MD, the earn-and-pay segment will see earnings at its best in the next two years
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With buoyancy back in vehicle sales, Ramesh Iyer is confident enough to state that the future looks bright for his company.
Yet, the Vice-Chairman and Managing Director of Mahindra Finance still sounds out a note of caution. “Has it gone back to the pre-Covid levels? I may still be hesitant stating this even though almost every segment that was suffering then is back to action,” he says.
Why then is Iyer being circumspect? Simply because even while the momentum is in place, it is still not in “full swing” especially key segments like cab operators for instance. “Tourism has picked up but is everyone travelling? Crowd levels are high but I think people are still a little hesitant and would rather wait a little more before they take off on a holiday,” he elaborates.
Beyond this, the fact remains that there is still a waiting list for new and used cars and had this not been the case, Mahindra Finance’s disbursements would have been much higher. People are not exchanging their old vehicles since they are not getting new ones. “We have seen this in the past that when demand starts to pick up, collection improves and that is a reflection of the cash flow in the market,” explains Iyer.
From his point of view, rural India will be a story to watch out for over the next couple of years thanks to generous allocations being made towards development of roads coupled with the opening up of mining and coal excavation gaining ground. “We have also been fortunate that the monsoons have been good over the last three years and above average this time too,” he says.
Tourism will continue within India which is another big plus for cab operators especially when it comes to visiting temples. “This augurs well for tourism and every temple is drawing huge crowds today. The earn-and-pay segment will see earnings at its best in the next two years,” adds Iyer.
Concerns about volatility
There are concerns though especially on the volatility in fuel prices as well as rising interest costs which will hike operating costs. Till such time operators cannot pass these on through freight rates or passenger fares, there will be pressure on their earnings. “Yes, this will be offset by the volume of earnings but nobody wants to see margins going down,” he says.
Typically, when operating costs go up, they do not build pressure on demand. It is only when vehicle prices increase does demand get impacted because this will be factored in operating costs.
“I am not worried about the demand side but when it comes to operating revenues and margins for people, we will have to wait and see how the freight rate movement begins to happen and how passenger fares get repriced,” says Iyer. This upward revision is likely to happen during the festive season and that is when the picture will become clearer.
Whilst on the subject of rural, he believes that aspiration levels are higher now with people now buying premium two-wheelers and cars quite unlike the not-so-distant past when entry-level models were sought after. In the process, new dynamics could emerge where demand for used cars and bikes will increase going forward.
It is Iyer’s reasoning that with entry-level options becoming more expensive now, customers will not be inclined to cough up so much money to buy them. While the more affluent in rural India will settle for premium options, as is the case right now, others will seek pre-owned vehicles which are more affordable.
“They would rather buy a secondhand motorcycle for Rs 30,000, use it for a couple of years and then go for a bigger one. The same thought process will extend to a car. It is not as if entry-level cars are not being bought but the action is confined to the secondhand market which clearly means there is an affordability problem in this segment,” he says.
Therefore people at the lower end of the pyramid would rather buy a used car for Rs 2.5 lakh while others with higher disposable incomes can bring in Rs 1-1.5 lakh and then borrow the balance Rs 8-10 lakh to acquire a more premium option. “So there seems to be a little more pressure on the minimum earning segment who are not able to afford a new product and are going in for second hand vehicles instead,” sums up Iyer.
Right now, the bigger problem is a shortage of vehicles, both new and old, thanks to the chip shortage and this has prompted people with their own cars to adopt a wait-and-watch attitude instead of swapping them for new models.
“Only when the chip crisis goes away and new vehicles become available will somebody sell their old cars. Perhaps things will improve and with everybody getting ready for the festive season, the hope and belief is that it will be big,” he says.
According to Iyer, there are reasons to support this optimism since the last two years of the pandemic have been difficult and spending has come down significantly too. “Wedding sizes have become smaller, tourism costs have reduced and all that money saved is now available in some form or the other,” he says.
Last year saw a spurt in purchases of televisions and refrigerators and now with companies restoring salaries (which were pruned during Covid) and paying out bonuses, there is more reason to buy a car. While Mahindra Finance is bullish about the road ahead, it is also eyeing new growth opportunities in areas like small and medium-sized enterprises (SMEs).
“My understanding of financing is that you should not enter a business because you see this as an opportunity now…you must see this through a cycle to say when and how long it will keep going down and when it will bounce back,” says Iyer.
In the case of SMEs, the new growth engine for the company, the key is to have a “phenomenal relationship” with OEMs to understand how they are forecasting their schedules. If all of them are launching new products and upbeat about growth over the next 2-3 years, there is no reason why an SME in the auto engineering space should falter along the way.
“In fact they will all be overbooked with orders and looking for capacity expansion,” he adds. This is the time when a loan is given, not for one or two years, but for a good five years. As Iyer explains, it is important to be prepared for two years of a boom followed by a one-year lull. After all, if somebody has “paid you two years regularly, there is no reason he is going to run away” unless he is a newcomer in the SME business.
“We are choosing such SMEs who have been in the business for at least 10 years and have clear OEMs with whom they work in terms of some minimum strategic importance,” says Iyer. His company deals with top OEM brands like Mahindra, Maruti and Tata and the way forward is to look at their supply chain carefully even while taking into account that no Tier 1 supplier will queue up for a loan.
Yet, it is this top rung which will help Mahindra Finance with more details on their sub suppliers as well as some backing — not in the sense of guarantees — but at least share production schedules given to them. Additionally, pointers like how long they have worked with the Tier 1 vendor and their financial status would be other valuable inputs.
“Now there could be some suppliers who are strategically important for these OEMs but have just come into the business. In this case, you may want support and this is where we work out different categories of A, B and C,” continues Iyer.
The ‘A’ slot comprises longtime partners for the OEM concerned while ‘B’ consist of large vendors who have always remained under financial stress because they have never got sufficient money from the banking system. Here is where Mahindra Finance would help out filling the gap of 10-15 percent or whatever the case may be.
‘C’ is the group of small or new suppliers where help can be extended by way of working capital. Iyer points out that the SME business will be a separate vertical headed by somebody who has experience in this space and supported by a good team to handle different OEM accounts.
Agriculture is yet another interesting growth area and this is familiar territory too in a sense because of M&M’s own experience in the farm space with its tractors. “We have done work with some dairies and food processing units. We see institutionalisation happening in agri where warehousing will open up and many food processing units will come around these locations. Logistics will also pick up,” elaborates Iyer.
This is the time when there will be a need for refrigerated vehicles and air-conditioning warehousing for storage which will open up a huge opportunity. The key, he adds, is to invest in advance and not put it off till the actual activity begins. “You need to know the industry or start dialoguing. You must also start talking to logistics companies who are eyeing this space and start working with them,” he says.
The same trucks being financed for physical transportation to docks today may move into warehousing tomorrow and the idea is to “shift myself along with them to that requirement” which in turn could pave the way for more opportunities.
“Our belief is whichever industry we are participating in, it is critical to know it in and out. You talk to anyone in my business team and they will tell you how much a tourist vehicle earns, driver salaries, maintenance costs and so on,” says Iyer.
In fact, one of the key requirements for people joining the collection team is to get their hands dirty. For instance, a new recruit in three-wheeler financing is told to travel with the operator/driver the whole day. “I tell them to get into a three-wheeler in Thane and go all the way to distant Dombivli and ask the driver all kinds of questions on the way. Unless you do this you will not learn this business,” reiterates Iyer.
This breadth of knowledge will be as important in the SME vertical where the people involved need to visit the plant — “or whomsoever we are financing” — and spend the whole day looking at the entire manufacturing process. This has been the case with the Idhayam oil brand in the South or Prabhat dairy in Maharashtra where the team looked at issues on milk sourcing, storage, distribution and how much gets converted into other dairy items.
What challenges does Mahindra Finance see in the new electric vehicle space? “Our skills have to be a little further enhanced in understanding to whom you are lending rather than on what you are lending. So far, we have been lending on a tractor or truck and know if something goes wrong, we can take it back, sell it and be done,” replies Iyer.
In the case of EVs, one needs to know how to live with the life of the vehicle and therefore be able to have the skill to transfer it from A to B, B to C, C to D and, therefore, “there will be someone willing all the time to use the vehicle”. Hence, continues Iyer, financial competencies will have to be first built in terms of assessing people’s incomes and then lending to them. This is where some of the SME skills will come in handy here too.
However, he is of the view that before EVs become an individual choice, they will be part of large purchases by corporates and other institutions keen on spreading the message of sustainability. “This way, it will bring a lot of visibility and acceptability for these products and individuals will start getting attracted to them too,” he reckons.
The Mahindra Finance chief admits he is concerned about the huge levels of volatility being experienced worldwide in a host of areas right from crude oil prices and input costs to supply chain pressures. “I think cycles are getting very short which means business models must become extremely flexible. Earlier, we could set up a business and predict three years of boom where we could just chase and grow before going slow in a down phase,” he explains.
Today’s world is just way too unpredictable where “you just start doing something good and think things are beginning to happen” before the script goes completely awry. In the case of Mahindra Finance, over the last three years, the focus every six months shifted from asset to liability… “it started with liability pressure, liquidity not available, store money” and so on. Suddenly, vehicles were not available and things just became more difficult.
“While you may have a three or five-year plan, you must put in a team which is watching every quarter very closely on what needs to change. You need to have a long term vision along with a very close/immediate vision,” says Iyer. This becomes critical in events of liquidity pressure and storing money at a cost which is perhaps better than running a risk of having no money.
By the end of the day, VUCA (volatility, uncertainty, complexity and ambiguity) is here to stay and the challenge lies in tackling it with competent manpower. “While on the one side, there may be lots of people, not everybody is good and skilled enough for everything. So I think the second area that is going to occupy our mind is training and making people relevant while keeping them engaged and putting in efforts to retain them,” he adds.
All this will doubtless come at a cost but as he puts it it is important for employees to feel respected enough within any organisation or ecosystem. “People are also very choosy about all this…if we think it is about money, it is not necessarily so,” says Iyer.
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