Muthoot Capital profit de-growth in Q2 an one-off: Madhu Alexiouse

Despite tax cuts, we will benefit only in Q3-Q4. But we have faced the impact of a deferred tax asset of about Rs 9 crore. Our operating expenses have been elevated a bit, says Madhu Alexiouse, COO, Muthoot Capital. Excerpts from an interview with ETNOW.

We saw your profits de-growing nearly 34%. What was the reason for this weak performance? Was this a one-off or would that pressure continue?
I will come to why the PAT is impacted, but there are some positive signs that we need to look at as well. We have seen disbursements bottoming out and compared to last H1 and QoQ, we have maintained a steady disbursement and our book has grown.

We were very selective about areas where we will grow and where the collections are impacted we will de-grow there. From the areas where we wanted to grow, we have grown by about 15% despite the market de-growing by about 20% in Q2. We have shown a very positive growth as far as our disbursements and our book are concerned.

As for PAT getting impacted, there are a few very important things that we need to look into. One is on the finance expenses. The first half of last year was a very sweet spot for us in terms of finance cost which was about 1% lower than what it started last October and it continues this H1. That was a big additional impact. Though liquidity is eased out, the cost of funds is at elevated levels. We expect that Q3-Q4 should come down, though not in the desired way.

The second important thing is despite tax cuts, we will benefit only in Q3-Q4. But we have faced the impact of a deferred tax asset of about Rs 9 crore. Our operating expenses have been elevated a bit. In fact, August is the time when the festive season starts. Onam starts and then comes Dussehra and then Diwali.

August is the time when we invest heavily on sales promotions in advertisement, in market leading schemes and market leading incentives for intermediaries. There is a cost associated with how you generate your market share in the market and then the benefits come in the Q3 and Q4 as well. Those were the additional costs. The operating expenses are at an elevated level.

In August, we had a negative impact as far as NPAs are concerned. Last year, only Kerala was impacted due to floods but this year other than north Kerala, north Karnataka, Maharashtra -- all have been badly affected.

In fact, till September we had difficulty in collections there and few other states where we had problems pertaining to natural disasters, especially in August and September. It has impacted not only the quality of collection but has also increased our collection cost.

In the quarter gone by, we want to focus on your asset quality. What trends are you seeing now for the coming quarters, given that we saw a slight deterioration?
Generally in Q2, we see a good downtrend as far as NPAs are concerned. August was a kind of one-off which has impacted us. Q3 is the time when the rural sectors look good and otherwise also, because of the festive season, the cash flow of the customer improves and we are confident that Q3 definitely would be an improvement in the asset quality.

The way the cash flows and the way business is picking up during this Diwali, it is really encouraging. I have firm reasons to believe that things would look much better and this was a one-off what we have seen in Q2.

What about the borrowing costs? How were they in the current quarter and where do you see your borrowing costs stabilising and also your borrowing mix that is shaping up over various sources?
The main source of our funds are banks. Borrowing cost had remained at elevated levels around 10.3%. We are seeing mild reduction in Q2 but it is Q3 and Q4 where we about 10-20 bps may come down. As of now, it is around 10.3% plus minus 0.03%.

Disbursements are also down. Talk to us about the segments showing signs of higher stress. When do you expect a pickup in demand and your outlook going forward as well, particularly also for the auto sector?
In terms of the industry as a whole, the two-wheeler industry has seen a de-growth of about 20% in Q2. We are hoping that this festive season (October and November), we hope things would bounce back. The initial trends are very encouraging. There is no specific areas where I can say that these are the areas which are not looking good or these are the areas which are looking too good to do business. We have our internal way of assessing areas, we have identified districts where we grow our business and which are the areas that could de-grow.

It is at district level, at PIN code level, that our credit and risk teams work and we grow at the areas where we prefer. For example, our growth in the segments where we are making money was about 15% which is how we focus. There is no specific state that is not doing well or doing better. Definitely for us, east was a fantastic area which has shown a very good growth compared to last year. We hope that Q3 should be much better than Q2.

Did your elevated funding costs dent your margins or were you able to pass that on to the consumer? What is your margin trajectory?
Our cost of funds remained at elevated levels of about 10.3%. We passed on a piece of it during the last year when the cost of funds went up, but there is a limit to which you can pass on. You have to absorb a bit and around Q1, Q2 is where we had remained steady as far as our pricing or the schemes are concerned.

We did not increase our rates. Neither did we reduce it drastically because our cost of funds remained stable. The margin should improve as we get into Q3 and Q4 when the cost of funds comes down. When it comes down, we will be able to pass on certain benefit to customers as well. The margins have impacted a bit as far as cost of funds are concerned, but we hope to see it improving going forward.