Dinanath Dubhashi, Managing Director and CEO of L&T Finance Holdings Ltd, discusses figures for T2FY22, demand trends, disbursements, expansion and M&A plans, segment competition and outlook on the market. position of the company over the next five years, including in an exclusive interview with Swati Khandelwal, Zee Business. Edited excerpts:
Q: Take a look at the highlights of the second quarter numbers and what kind of demand trends were seen this time around and how it improved in this quarter?
A: I’ve always said that the last 18 months of COVID have been very unusual months. The first six months were very bad, the next six months were very good, and another six months were bad. The first thing we decided on this, and which was also supported by the board, is that instead of focusing on quarterly numbers, we will focus on building strengths. These strengths will simply not help us successfully exit COVID, but will also contribute to medium and long term growth and profitability growth. So the first thing is business growth, business trends and if you see – our overall AUM is negative, but if you look at it in detail then our rural growth – which is our profitable product and we have been saying that ever since. more over the next 5-10 years this will be our area of focus – increased our market share and throughout this period our portfolio growth has been positive.
If you look at this quarter, in rural areas our tractor growth has been positive and we have maintained our market share there, our growth has been positive in two-wheelers. In fact, this quarter was our best second quarter for both of these products. Apart from that, if you look at two other products, microloans and consumer loans, although microloans are an old product for us, we saw very less disbursements in the first quarter and we started disbursements in the first quarter. second quarter and in September we hit Rs 900 crore, in fact Rs 900-1000 crore is our normal racing rate. These were bolts for the third and fourth quarters, because if we make a disbursement of Rs 1,000 crore every month of the third and fourth quarters, then good growth will be achieved. In the case of consumer loans – a new product for us and a fully digital native product – we hit an execution rate of Rs 500 crore in one quarter. So, good growth has been seen in rural areas, but if you look at the trend, the third and fourth quarters will be much better from here on out. This is the first title.
The second headline, which is very important, is that if you look at our collection efficiency, our collection efficiency on all products has reached pre-COVID levels. This highlights our strengths in collecting data and our strength in data analysis. The second thing we have done is that the additional provisions in addition to the GS3 and NPA provisions we have made for Rs 1750 crore. With this figure, we can confidently say that we left a bad impact in the second quarter. The third thing is that our capital adequacy has reached 25%, which is pretty healthy actually healthier than it should be. So there should be more growth to come. So if three things are taken together ie rural strengths and increasing trend; provisions, collections (collection at pre-COVID levels) and good levels of provision to put COVID behind us and excellent capital adequacy, which can ensure that without raising more equity, we can grow well. After that, the last point is that in terms of profit, if you have sequential growth, then from Q1 to Q2 our PAT growth is 26% and PBT growth is 34%. So if you see a trend, the second quarter results look very positive.
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Q: Is pent-up demand one of the reasons for high disbursements? Over the past few quarters, you have been a little cautious about disbursements and do you think this trend will continue in terms of disbursements? Also keep us up to date with asset quality and have you noticed any slippages and restructurings?
A: That’s a good question and I will answer both one by one. First, in terms of pent-up demand, I think a lot of pent-up demand ended in the second quarter. In the third quarter – I’m talking about the industry – demand will be based on economic fundamentals and I don’t think there will be pent-up demand in the third quarter. Diwali is approaching and Dussehra has just died out and we hope Diwali will see an increase in demand, especially in rural India. But there are two factors –
(i) Like I said pent-up demand doesn’t seem high enough and if growth is based on economic fundamentals then that’s a good thing.
(ii) Monsoon, while the overall monsoon has been pretty good but its distribution, if you look from June to September or the geographic distribution, I don’t think anything very optimistic is going to happen. I think things will be moderate, however, there will be growth but a lot of runaway growth i.e. rural areas will be on fire as if the situation will not happen. I think it will remain moderate.
By virtue of this, considering our strength, even in this situation, the growth of the tractor and two-wheeler industry was negative in the second quarter but we showed positive growth. We will maintain this growth and as I said that two products, the microloans – we hardly made any disbursements in May and June – in July and August it worked and in September we achieved a good rate of execution. Now what this really means is that Q3 and Q4 will be better than Q2. At the same time, consumer credit will also remain good. If you look at the long term, not the next six months but the next two or three years, then we are also launching new products like we are launching SME and its pilot will take place in this quarter. We will gradually launch rural products and, which will go beyond tractors for farmers to other products.
Also, we call it responsible consumption i.e. we start with health and education loans and these two things will be widely launched in FY23. So, it seems that short term growth from existing products and more medium to long term growth arises from new product launches. You would also have seen a new trend, retailization, which stood at 25% five years ago, now reaches 47%. I wouldn’t want to provide a short term estimate for the same thing, but in the next five years retail will be around 60-70%. Obviously, the retail business being more profitable is important for the profitability of the business.
Q: Do you have any merger and acquisition plans to strengthen your position?
A: You asked a good question. So what do we plan, when we plan, we plan for organic growth and the sector (s) we would like to expand into. Inorganic growth cannot be planned, there must be opportunities, which means you can plan about three acquisitions. But, we have planned the areas in which we need to expand and in the next three months we will bring a detailed plan of the same to the market in which we will provide the details, providing just a few snippets for now. I talked about the priorities and based on the same, the organic will depend more on our customer base as well as knowledge, data analysis, among others. In terms of inorganics, the first thing we’re going to focus on is the wallet world. So rather than mergers and acquisitions, taking over the companies, we will first focus on the portfolios, because there are several NBFCs, which are not able to grow, there are FinTechs and we are going to d ‘First we attach ourselves to these and take a portfolio and as soon as we feel an opportunity is available at a reasonable value, we will seize it. And, our 25% capital adequacy will help us do that, we don’t need to put in more capital to take that. Compared to the 15% required, we are at 25%.
Q: Competition is increasing in this space. Where do you see in the next two to five years and do you have a project for the Group and the company and what is the area in which you want to excel and lead? Plus, how is the mutual fund vertical performing?
A: First of all, I would like to answer your first question. The competition is definitely there, but if you look at the financing of the retail Indian population, especially in rural India, the penetration is quite low. I would like a small example of the two-wheeler market, out of 100 two-wheelers sold, only 27-28 two-wheelers were financed three years ago, but today already 52 two-wheelers are financed. Thus, funders increased penetration by making efforts and convincing people. So two things will happen (i) the penetration will increase and (ii) the opportunities will also increase. At this point, we welcome competition because like many good players, responsible players will enter this market, India’s retail market will grow and expand and it is a need of the moment. Mr. Nandan Nilekani once said that the Indian retail market is awaiting its WhatsApp movement and I believe the WhatsApp movement will take place within the next five years.
In the case of retail, especially rural retail, I think the market is going to grow vertically and exponentially over the next five to ten years and we will definitely be there to take advantage of that. Our investment will be such that everything we do, even in rural areas, will be completely technology driven. We will go digital throughout the product cycle and not just in acquisitions but in acquisition, credit, loan servicing, repayments, collections, we will go through technology. We try to convert 100% of our process to technology. The new products that will be launched will be 100% digital native, no paper will be involved. What it will do, first the turnaround time will be good, and second, the decision making is good, expenses are reduced and customer service improves. So, I will talk in detail about the plans around the next quarter but I would like to inform you that the positioning that we are thinking of is FinTech on a large scale. So we will behave like a FinTech but also create a scale because I don’t know of any FinTech that has created a balance sheet of at least Rs 2,000-3,000 crore and we will be a FinTech with around Rs 60,000-70,000 crore and it’s kind of retail balance sheet and maybe in the next five years at Rs 1 lakh crore. So this is the kind of positioning and ambition that we will have. In five years, life is going to be very, very exciting.