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«“Mahindra Finance Q1 FY16 Earnings Conference Call” July 27,2015 MANAGEMENT: MR. RAMESH IYER – MANAGING DIRECTOR, MAHINDRA FINANCE MR. V. RAVI ...»

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“Mahindra Finance Q1 FY16 Earnings

Conference Call”

July 27,2015











Page 1 of 18 Mahindra Finance July 27, 2015 Moderator: Ladies and gentlemen good day and welcome to the Mahindra Finance Q1 FY16 Earnings Conference Call hosted by JM Financials Institutional Securities Limited. As a reminder all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing ‘*’ then ‘0’ on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Karan Uberoi of JM Financials. Thank you and over to you sir.

Karan Uberoi: Thank you, good morning everybody and welcome to Mahindra and Mahindra Finance’s Earnings Call to discuss the first quarter FY16 Results. To discuss the results we have on the call Mr. Ramesh Iyer who is the Managing Director, Mr. Ravi who is the CFO, Mr. Dinesh Prajapati who is the Vice President – Treasury and Corporate Affairs and Mr. RakeshBildani who isSenior Manager, Treasury. May I request Mr. Iyer take us through the financial highlights subsequent to which we can open the floor for Q&A session, over to you sir.

Ramesh Iyer: Karan one quick input which is, Ravi has been elevated to the Board and he is now the Executive Director and CFO of the company and this was done on the Board Meeting that we had on Friday.

Karan Uberoi: Congratulations Mr. Ravi.

Ramesh Iyer: So we kind of get into the results and then of course the overview but instead of me going through really number by number I am sure everyone must have already seen it, read it and understood and therefore let me get into what is causing whatever that you are seeing as number.

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because their own bills are outstanding, the work that they have completed is kind of yet to produce results for them and we are able to see the pressure of that on our customer front and when I say the overall activity, it also somewhat from it was, let us say one year back or one and half year back situation, the activity seems to have substantially come down and the activity on various fronts have come down. People who are attached to infra projects they are not able to see many major contract segments are still operating. When it comes to the farm you know we had this untimely rains in between that has further impacted the customers substantially and each of this is a little at bit which harms a company like us which are deep into the rural market.

It is also important to understand by geography and it is unfortunate that we're not seeing any major positive activity big-time in any state as of today. While every state is preparing for that little future to come about but if we speak about what is happening particularly at this stage we are not able to kind of say that things are changing big-time whether it is from the coal block activity, whether from the mining activity or for that matter from the road infra activity. But we are seeing some signs of preparedness at different levels when we talk to contractors, when we talk to major operators they do seem to be getting ready for it but are the ordering process already commenced, are the tenders out, are the people been given contracts to start execution?

I think the answer is no. But also it is interesting when we look at it and I am more speaking from a collection perspective is that while the overall weakness is seen in the system in terms of people not able to earn enough to pay but we do see that intentionally that these customers are servicing the loans even from whatever that they are collecting or they are executing. So if you look at the movement of contracts, if you look at how much has the customer been able to pay? We do see that there is a movement in substantial portion of the customer account but once they have built a large overdue they are not able to earn enough to be able to pay and come out of that situation very quickly. So that is something that we are continuously monitoring very closely. These are all collateral based business and therefore what we also keep measuring almost all time is what is the level of outstanding and what is the value of the underlying collateral and therefore is it sensible to wait for things to change or we need to act faster and the sense that we get is that definitely the collateral is in a position to protect the principal outstanding while it may not be sensible at this stage to repossess the vehicle and try and transact on them because the second-hand prices are also going to remain subdued given the activities levels around there.

The monsoon which started off well in June did not show great promise as we moved into July but it has revived again and the news that we get from most of the states is the monsoon is likely to be average plus and that would be a good start point from a sentimental point of view while not every customer is farm dependent for their cash flow but ultimately the market that we service sentimentally definitely does depend on this. But the volumes out there are still low whether it is auto, tractors anyone of that and while we are protecting our market share we are not able to see a big time growth happening out of that.

So when you look at this quarter results in particular, after a great fourth quarter that we had and as I said with the stretched cash flow the customers are not able to service loans on a

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monthly basis so someone who has paid in March and will not surely be able to pay in the month of April may would have paid in June so it has got some kind of an internal regulatory correction that the customers have gone through in terms of their ability to pay and even if they are servicing it on a monthly basis sometimes they are not able to service the full loan, but there is a moment as I mentioned earlier.

From the volume perspective the discounts continue, the volumes are low and therefore you will see the impact of that happening to our growth story whether it comes to disbursement, whether it comes to asset growth or even for that matter more importantly when it comes to the income growth. In a business like ours every year you will have a set of contract maturing and a new set of contract coming in. But if the volume of contracts going out and coming in even though they are the same but if this is due to product mix change sometimes the income could be very different from these two set of contracts. And one of the impact of that is what one would see in this quarterly results of ours, that certain contracts which have matured and gone out had a different level of income that was being booked on those contracts when they were live and as against that when the new contracts have come in they are at a different level of income. So therefore the net income growth that should have happened has not substantially happened and that has happened to us almostto the first time over a period of time where there is a pressure that have seen from the income growth perspective coming in because of the lack of volumes that one is seeing in the market, but I personally think that that is temporary nature as our market starts correcting and the volumes starts coming in, this will also start getting corrected.

Strategically we continue to believe that there is room for growth as time opens up, we have added branches, we have added people, we have invested in training people, we have also invested in technology platforms as required and therefore we are ready to wait as and when the opportunity opens up we will be able to capitalize but we do not want to kind of move faster to say having built all this infrastructure should we now chase growth? The answer is no.

I think the market is still not ready, we have the patience to wait for, it does not add substantial cost to us, we are utilizing this infrastructure that we have built more on the recovery front and therefore we believe that it is just a matter of time when it opens up that will be able to capitalize on it.

We very strongly think that what we miss in one quarter to some extent would get corrected in the following quarter like for example if you take Maharashtra as a story, even though sugarcane was good but the sugarcane prices were inadequate and the sugar mills did not pick up sugarcane, the cash flows does get impacted. Now, I would call this transactional, this is not fundamental. This would get corrected as and when the sugarcane gets picked up the cash flow will come in. The fundamentals I would say are there are equipment ready to be deployed but contracts have not been issued and therefore the underutilization of the asset happening.

In the improving states while we always talk about Southern states to be the most difficult ones and they continue to remain, but states like Andhra, Telangana, to some extent Tamil Nadu have started showing signs of improvement but they are still in the zone of attention that we

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need to have, they are still in the high zone. But the new States which have come in during this last 3-4 months which have been more impacted by the cash crop getting spoiled due to the untimely rains are states like Maharashtra and Madhya Pradesh. So when we have presence in this market and they go through this temporary phases we need to live this life with them and that we are not overly worried about, is things cracking, my answer would be while they are difficult at this stage we are not able to influence a decision on the customer but we are able to meet customer, we are able to inspect the asset and we are able to keep the cash flows going and therefore when things open up we would possibly be one of the strongest beneficiary of the change that can happen. But surely we continue with our strong practice of not to reschedule even a single contract even though there is a pressure from the customer end to ask for it. We continue to remain focused on our policy of not to increase LTVs to chase growth, we are still in the medium LTV zone 70-75% to the asset. We are not changing our terms in terms of dropping the rates etc. What you see as little margin pressure for us is not arising out of drop in interest rates of lending but it is also arising out of the product mix change. So if you less of tractor business or less of let’s say a UV business and that's replaced with car business and the car yields are always lower than the tractor yields. So you will always see on the net interest margin levels these kinds of pressures coming in due to product mix, but that's a new normal that we are getting adjusted to. Once the industry opens up then you will see many of these getting corrected. We have seen similar situations in the past where you see built up of NPA happening but the credit losses are not galloping the same way. The credit losses still remain in the zone of below 2% kind of a situation, the collateral do have its respective values.

Decision to reposes or not is more internally driven policy and therefore we are willing to live this life, have patience and then once things open up I think we are all ready to capitalize on the emerging new opportunity.

Our focus will of course will remain that people will be driven to focus more on collections, to maintain asset quality, we have formed internal teams and task forces which will look at different buckets, different products, different geography but those are operational decisions but in as far as strategic decision and fundamentals are concerned I think we are continuing to believe to go more deeper, capitalize on our existing customer relationship, tie up with various OEMs who are looking at rural as the geography for growth, remain focused on our internal processes and policy and not tamper with them at this stage for growth, but keep our eye more focused on collections and as and how the opportunity emerges we will ensure that we do not miss out on this emerging opportunity.

So net net I would think while this has been one of the most difficult quarters that we have gone through in terms of high effort low result situation but that is most driven by what is fundamentally happening at the marketplace. It is not an outcome of is the business model needing to be revisited. No, the business model is still the same,its same people with the same passion driven for the same segment of customer financing the same type of products and the geography that we are used to for the last 20 years, but that would not mean that we don't need to keep revisiting them and keep adjusting them to the changing environment, but it only means that the fundamentals of the business have not undergone any major change while temporarily there are pressures out in the market.

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