Auto financiers riding recovery in rural markets

Has investor sentiment towards NBFCs heavily dependent on the rural economy changed?

There are factors that have reassured investors that the firm’s balance sheet is improving, and defects will be checked in the coming quarters. Initially, collections have steadily improved in July and August, coinciding with the lifting of restrictions triggered by the second wave.

Mahindra Finance registered a collection efficiency of 97% in August, up from 95% in July. The collection efficiency averaged around 75% during the June quarter. The lender, meanwhile, is taking measures to do business in the post-Covid world. While the pandemic hasn’t changed the business landscape dramatically, Mahindra Finance has relied more on real-time data and redesigned products for customers, the firm’s managing director Ramesh Iyer said in an interview.

“Our use of data has become deeper. We are now increasingly looking at partnerships. We have also redesigned some financial products.” The change in attitude towards collection has also helped the firm to improve its crime rate.

But this is only part of the story. Lack of business growth was also behind Mahindra Finance’s deteriorating asset-quality metrics in the past quarters. Its assets under management (AUM) shrank 3% year-on-year in the June quarter, the five consecutive quarters in 2020 following the pandemic. This is a far cry from the high double-digit growth seen in earlier years. Disbursements were also affected, but now they are looking upwards. Analysts believe that the revival of the rural economy is key to improving the growth of Mahindra Finance’s business.

Iyer believes that rural income is poised to grow in the next 2-3 years. “I am confident that after October, we will see growth similar to what we saw in 2010-14,” he said. For FY22, however, he expects AUM to remain flat. “The fall we are seeing so far will be arrests,” he said.

The firm is betting big on restarting infrastructure projects, which will boost demand for commercial vehicles and tractors. This spurt in infrastructure activity, coupled with a revival in the rural economy, will significantly improve disbursements growth. A normal monsoon and an encouraging pace of sowing raise the prospects of a pick-up in rural demand. With a possible increase in rural income, delinquency is also expected to decrease as the repayment capacity of borrowers improves.

In a September 2 note, Citigroup Global Markets India Pvt. Ltd. had pointed out that the firm’s valuation is modest, and a better growth outlook would warrant a re-rating. With a growth of 29%, the shares are trading at around 1.5 times the estimated book value of FY22.

To be sure, tractor sales in August did not live up to expectations and dampened enthusiasm about growth. Tractor and commercial vehicle financing are the largest lending segments for the firm. Perhaps investors are looking for more conviction because the gains, despite recent gains, have yet to reach pre-pandemic levels.