Mr Ashutosh Shukla, Chief Operating Officer, Magma Fincorp Limited, joined the company in 1992 and has handled many responsibilities including National Recovery Head, Business Head – North etc. His last assignment was as Head of Magma Asset Reconstruction Division. He is a CA and has over 19 years of industry exposure.
Magma Fincorp Limited is a non-deposit taking non-banking finance company (NBFC), registered with the Reserve Bank of India (RBI) as an Asset Finance Company. The Company, having started operations over two decades back, is listed on the Bombay Stock Exchange Limited and the National Stock Exchange in India. Magma provides a bouquet of financial products including financing of Utility Vehicles & Cars, Commercial Vehicles, Construction Equipments, Tractors and SME Loans. Magma has a dedicated customer base of over 2 lakh customers and has assets of approximately Rs93.90bn under management
Replying to Anil Mascarenhas of IIFL, Ashutosh Shukla says "We plan to concentrate on expanding our footprints in Western and Southern markets".
Are you seeing a significant turnaround in the economy. To what extent are you benefiting from the same?
We are attractively placed to capitalize on the anticipated economic turn around on the account of some proactive decision. Our deep penetration into semi –urban and rural markets, which account for more than 70 percent of the Indian population, is a big strength. Our wide experience in these markets makes it possible for us to capitalize on the emerging demand for credit.
We are among the top asset finance companies in India with a wide variety of product offerings and expansive distribution network, making it possible for us to capture every economic upturn across the vast land mass. Our cutting edge technology ensures 24X7 connectivity, resulting in informed service–driven decision making. We will also reinforce our operations and strengthen our profitability through additional business verticals and strengthening throughput and asset quality.
Overall economic growth is expected to catalyse the commercial vehicles market in 2010-11 as already reflected in enhanced CV sales in Q1. Magma is well placed to take advantage of the same and further consolidate.
The government identified infrastructure spending as a key area to combat the slowdown. In line with the domestic infrastructure activities, the domestic construction equipment market is set to expand five-fold to US$13bn by FY 2015 from around US$2.3bn in FY2007. Magma will benefit from this market expansion.
What is the total business done last fiscal? Comment on your financials and what is the outlook?
Aligned with the improvement in the automobile and vehicle sales, Magma too has been able to register growth of 42% in Q1 of this fiscal as compared to same period of last fiscal. We successfully increased the share of our high yield products to 16% from 13% in Q1 FY 10 which along with superior Treasury Management and efficiency in handling cost of funds ensured we achieved NIM of over 5.5% in Q1.
The company recorded Profit before Tax (PBT) of Rs277.1mn and Profit after Tax (PAT) of Rs177.1mn in Q1 of this fiscal, an increase of 61% over the corresponding period last year.
With Primary sales of asset growing at well over 20%, we will now will focus on growing their top line and bottom-line further in FY11. We will also concentrate on expanding our footprints in Western and Southern markets.
Cite the contribution from each segment. How is it likely to change in the coming years?
Magma did total of Rs3.84bn, in the CV segment, in Apr - Jun 11, implying a growth of 71% over last year same period. CV business contributes about 37% to fresh business. Magma did total of Rs10.47bn business, across all segments in Apr - Jun 11 implying a growth of around 42% over last year same period. The Construction equipment business contributes about 24% of Magma’s fresh business, Car contributes around 24%. The higher yield products, comprising tractors, used commercial vehicles (Suvidha) and SME loans, account for 16% of our business. Their share is likely to increase to about 20% in FY11.
What is the demand you see for new and second-hand vehicles? Give us an overview of Suvidha. How much of your revenues come from here?
Along side demand growth in the new vehicles in both commercial and personal segments, there is a good opportunity for used vehicle financing for us, given our network in semi urban and rural India.
We have a product called Suvidha for exclusively dealing with funding of old vehicles. The average loan size is Rs4 Lakh with average 33-month tenure, with a gross margin of 9-10%. Currently, this product contributes about 4% of overall volumes, at Rs390mn of business in Q1 of this fiscal, which was a growth of 95% over last year same period.
It is now being operated from about 45 locations, going forward, we will be funding used vehicles from larger number of locations, about 100 or so and also funds some of our existing high quality customers. This would significantly increase the volumes.
Your view on margins?
Today, we are enjoying net interest margins of around 5.5%, thanks to increased share of high yield products and our ability at keeping cost of funds at lower level. Going forward, we may see some increase in interest rates, while at the same time, the share of higher yield products too will go up to overall 20% this year. We are confident that we will sustain interest margins of 5.5%.
Tell us about your entry into the general insurance sector.
Magma Fincorp Limited and its Promoters signed a Joint Venture agreement with HDI-Gerling International Holding AG, Germany to enter into the general insurance sector in India. HDI-Gerling International is part of the Talanx-Group, 3rd biggest insurance Group in Germany. The Joint Venture headquartered at Kolkata, will leverage on the strengths of the two companies to offer general insurance products through the existing strong distribution and service network of Magma with deep penetration in rural India. Magma has a strong network of 157 offices across the country with strong focus on the rural and semi-urban markets. 77% of Magma's branches and 63% of its customers are in the rural and semi-rural areas, which are generally underserved markets for insurance products. The Company has served an important role in financial inclusion in these markets with more than 50% of the customers of Magma having availed their first time loan from the Company. Through the joint venture HDI-Gerling would bring along its unique product design and cost efficient operational management skills apart from offering an excellent reinsurance platform which would help manage insurance risks appropriately.
What is your strategy to achieve over 25% growth? How sustainable is it?
There are three main business drivers which help us strategize this growth rate.
- Collection Management- Collection management is critical to a company like Magma as it lubricates finances with regular inflow, minimizes debts and protects net margin. The importance of this function is underscored by the fact that over 70 percent of collections are derived from outside- city limits and about 70 percent of the collections in cash.
- Credit Management - The management of credit essentially focuses on financing individual and small businesses otherwise not considered bankable, owing to a dearth of collateral to establish credit worthiness. Since more than 62% of magma’s customers are present in rural and sub-urban locations, competent credit management protects asset quality and profitability.
- Asset Reconstruction – A new vertical for managing highly delinquent NPA portfolios was created with around 300 members cascading from the national to the zonal, state and field levels. The objectivity of the team was to help highly delinquent customers manage their debts and reduce their liability in a humane manner.
Like your peers, you too have a collection system, which is quite successful. What makes this click and what are the challenges in collection?
Risks, debts and losses are inherent parts of a business and one needs to accept it. But then one has to have a foresight and be cautious in order to address these issues efficiently and effectively. We, at Magma have a forward looking approach and thus as a precaution has put in process an effective collection recovery mechanism. We have our own collection team of over 2,200 people, we train them in-house and invest in their development. This is especially beneficial for our first time buyers and users which accounts for about 50% of our customer base who can interact with this team and develop a relationship with the company and the individual. This foresightedness has helped us achieve a milestone of recovering 99.9% collections.
Comment on your expansion plan.
Magma has ambitious plans for expansion with a focus on rural and semi-urban areas.
What is your message to shareholders?
We are quite bullish on the retail finance industry in India, given India’s economic growth, vast potential in transportation, construction and agri sectors and low credit penetration in semi urban and rural areas. Given our pan India distribution network, predominantly in semi urban and rural markets, and our competitive strengths, we are confident of increasing our business manifold in the coming years and our markets share across products. At the same time, our business strategy would be to further improve our NIMs and operating efficiency, which would translate into increasing return to our investors and shareholders.