But Anandan is not chary of admitting that competitive pressures are building up. "We remain clearly focused on achieving quality growth in our core product segment, that is commercial vehicle financing. Even amidst stiff competition, we have been able to retain and grow our market share, thanks to the strong relationships we have built over the years with our customers and automobile manufacturers," he says.

It's when the going gets tough that the tough get going. Probably because of this reason, Cholamandalam seems to have drawn the attention of two big time players in their respective fields. One is the formidable Rakesh Jhunjhunwala, who is said to have picked up a small stake in the company; the other is HSBC, keenly eyeing the company. Though there is no official confirmation, according to one source, it makes better sense for the latter "as it does not have a strong presence in this line of business and it would also help the bank gain a significant presence down south."

Cholamandalam is part of the century-old Rs 6,250-crore Murugappa group, which received the Distinguished Family Business Award in 2001 from the IIMD (International Institute of Management Development), Switzerland. This group has diversified business interests, ranging from engineering and abrasives to sugar and confectionery to sanitaryware and financial services. The past decade has seen significant rationalisation of its lines of business, with family-orientation and management control giving way to complete professionalism, a key factor that explains its new found agility to adapt to change.

Cholamandalam was started in 1978 under the leadership of A.M.M. Arunachalam, offering asset finance through hire purchase and leasing, to both corporates and retail customers. It steadily grew as a financial powerhouse and, in 1980, had its first public issue of Rs15 lakh. In 1985, Standard Chartered Bank invested 28 per cent in paid-up capital and Cholamandalam's long-term bonds were rated AAA by Crisil. The company expanded the scope of business to include vehicle financing in 1991 and, though Stanchart divested its holding in 1992, Cholamandalam had gained enough muscle to cross the Rs100 crore-mark in assets in 1993. The year 2002 saw the company's assets cross the Rs1, 000-crore mark. The three lead finance companies from the south - Sundaram Finance, Shriram Investments and Cholamandalam - have established unshakable reputation among customers for vehicle, equipment and lease finance as well as for deposits.

In its 26th year of operations, in its 26th year of operations, Cholamandalam's customer base has crossed the one lakh-mark. On the bourses, the company's scrip commands a high price, earning multiple almost 14 times (compared to 6-7 times in the case of some of its peers), hover around Rs120. It is rated among the top five NBFCs of Indian ownership, registering 40-50 per cent annual growth and increasing its asset base strikingly from Rs1, 000 crore in 2000 to Rs3, 200 crore in 2004, with 80 per cent of its assets from new businesses growing in the last five years. "The company has grown well over the years and its conservative approach has stood it in good stead," says one of the Mumbai-based merchant bankers. "However, the newer challenges emerging, with new generation banks getting aggressive in vehicle financing, could pose serious competition. The company is at crossroads."

Till less than a decade ago, none of the banks were willing to lend against heavy-duty vehicles other than passenger cars, for fear of being saddled with NPAs. Players such as Sundaram Finance and Cholamandalam were catering to this market need. The Shriram group largely focused on funding second-hand trucks and other heavy-duty vehicles. R. Thyagarajan, chairman of Shriram group in an earlier interview to Business India claimed that companies such as theirs was instrumental in showing the banks that there is a huge opportunity in truck financing. Today, ICICI is said to be the most aggressive in this area and is ramping up volumes. GE Capital, Citi (which also holds a stake in Shriram group companies involved in truck financing) and UTI Bank are also active, while the latest entrant, HDFC Bank, is said to be picking up pace.
"When these players get aggressive, how do you expect stand-alone companies, whose main source of raising revenues is from banks, to compete?" asks a merchant banker.

No licence to industrial groups Converting itself into a bank - though it has all the creditworthiness to fit the bill - is not possible, as RBI does not issue banking licence to NBFCs attached to an industrial group. However, Cholamandalam officials aver that NBFCs of the standing of Cholamandalam and Sundaram have their own stature, and need not convert to 'me-too banks'. They are not going to gain anything more as banks. On the contrary, they fear that they may lose the value additions they can give the customers...with the slew of new finance spaces such as mutual fund and insurance, they are now better positioned to target their customers for the entire range of financial services. "So, why aspire to be a bank?" asks one of them.

Though Anandan agrees that companies such as his may not be able to compete with banks in spreads, the fact that it has a track record and a good nationwide reach (120 locations across India) should stand him in good stead. Also, the fact that retail loans in developed countries account for 20-50 per cent of GDP, compared to only 3 per cent in the case of India, "creates a good growth opportunity."

Anandan is optimistic about the plans for increasing Cholamandalam's market share, despite overall rising interest rates and lack of change in lending rates in auto finance. "We have been continuing to manage our liabilities dynamically and innovatively..." says he: "with focused marketing and rigorous cost cutting, enabling us to leverage the growth in sales of automobiles." Though the 2005 balance sheet is not available, indications are that the spreads have been maintained. For the year to 2004, the earnings on average total assets stood at 12.84 per cent, compared to 13.77 per cent the previous year. With financing cost at 7.35 per cent (9.2 per cent), net spread post-provisioning stood at 2.38 per cent (1.77 per cent in 2003).

Cholamandalam's capital adequacy ratio stands at 18.6 per cent, as against the RBI norm of 12 per cent. It's NPAs level is at 0.8 per cent, according to company officials, down from 1.4 per cent in 2004. The NPA level would have been even lower, they say, but for the hit the company took on the tractor and two-wheeler lending. As a corrective measure, the company has taken a conscious decision to reduce the exposure on this front. As on March 2004, the break-up of total disbursement of around Rs1,000 crore shows that 56 per cent of it went to trucks, 28 per cent to passenger cars, 9 per cent towards three-wheelers and the rest to two-wheelers and tractors. Auto finance accounts for about 80 per cent of the assets and only about 15 per cent of the assets has gone towards capital market finance.

For the year to March 2005, Cholamandalam has seen the pressure on the top line, though bottomline seems a lot better, indicating operating efficiency. On a turnover of Rs 214.6 crore (Rs226.3 crore), the company raked in a post-tax profit of Rs 34.1 crore (Rs 32 crore). This translates into an earning per share of Rs 9 (Rs 11.3), on an enhanced equity base of Rs 38 crore, following a rights issue in 1:2 ratio. With increasing pressure on spreads, Anandan feels that new innovative structured products could help the company combat competitive pressures.

Last year, the company began lending against shares and this revenue stream is only going to increase. 'Property-linked loan' products are also on the cards. "We are looking to widen the sources of revenue through dynamic management of our asset book. One option is to offer structured securitisation products with a unique 'first loss' feature. We also propose to enter new products such as rental securitisation and mortgage lending." says N.S. Kishore Kumar, regional head, corporate banking, HDFC Bank, Chennai. "Being part of the Murugappa group is in itself a strength. In addition, Cholamandalam has carved out a place for itself among the top five NBFCs, despite the ups and downs this segment has seen. They have consistently innovated and grown their customer base with diversified financial services."

Cholamandalam's future growth drivers other than financial products would be to generate fee-based income by leveraging intangibles such as cross-selling motor insurance to auto finance customers and also to focus on improving profitability of its subsidiaries. Just as the Murugappa group has diversified and strengthened its corporate standing, Cholamandalam has reaped the reputation of its brand value and diversified into a number of areas such as mutual funds, stock broking, retail distribution network, risk management consultancy and insurance. The banners include Cholamandalam Asset Management Co (CAMC) for mutual funds, Cholamandalam Distribution Services (CDS) for retail distribution of financial products, Cholamandalam Securities Ltd (CSec) for stock broking, Cholamandalam MS Risk Management Services, a successful risk audit and management consultancy arm, and Cholamandalam MS General Insurance Company, a JV with Mitsui Sumitomo taking up a 26 per cent equity stake.

Liberal dividends
To meet its capital requirements, Cholamandalam came out with rights offering during two successive years, beginning 2002-03. Its capital moved from Rs 16-odd crore to Rs 38 crore. The two offering helped the company raise Rs 100 crore with reserves touching Rs 265 crore. The company has been liberal in dishing out 50 per cent dividend year on year.

How has Cholamandalam managed to remain rock steady in a sea of failing NBFCs? To understand its staying power, it is important to highlight the general environment in which NBFCs have functioned, and many failed. Anandan, a chartered accountant who joined Tube Investments (a Murugappa group company) in 1976 and has remained with the group since, has authored a paper on the NBFC sector, titled Prosperity Ahead. He has taken up the cause of NBFCs and how they have contributed to financing the core for high GDP growth; yet have, more often than not, floundered in an environment of weak regulation.The RBI, in its latest report, acknowledges the significant role of N B F Cs. They "are characterised by their ability to provide niche financial services, because of their relative organisational flexibility...and have often been leaders in financial innovations".

Are NBFCs over-regulated after the fiasco of the mid and late 1990s? The RBI Amendment Act of 1997 brought in stringent regulations and monitoring of NBFCs. This has prompted strong views on the competitive roles of banks and NBFCs. They are virtually competing for the same resources and business...yet monitoring of public deposits, for example, has been more stringent for NBFCs than banks. "The need to compete for the same business against this backdrop of tighter regulations for NBFC functioning has led to loss of market share, while, in general, NBF s have suffered despite better productivity, lower operating costs and lower NPAs." Consolidation of business portfolio is the best option when market share is under pressure, with new areas providing leveraging space. (Here GE Capital, though categorised as an NBFC, holds an advantage over its Indian counterparts as it has access to cheap foreign funds.)

This perhaps explains why Cholamandalam chose to enter other spaces. The best example of its consolidating talent is its risk management consultancy arm, which paved the way for starting the general insurance company. This business extension, started in 2002 as a risk advisory service to corporates, by a team of experts in industry segments, hazardous operations and environmental specialists, is now the USP for marketing the insurance business. It is also an independent advisory for over 150 clients on the complete spectrum of risk management and loss prevention.

N.V. Subba Rao, 42, who heads this, is an associate of the UK-based Institute of Risk Management and a certified OHSAS 18001 safety auditor. Talking about the business model, Subba Rao says: "The standards we have set up brings in lot of new clients who commission such safety and risk studies even at the design and planning stage. We have expertise in enterprise risk management, environment consulting, business continuity planning, safety audit, electrical risk management, lightning protection risk assessment, HAZOPS, transportation safety study in a number of industry segments like abrasives, pharmaceuticals, cement, electronics, chemicals, LPG, food processing and ITES. There is vast potential out there in IT, ITES and BPO. Today, companies are willing to pay for quality services."

The Bhopal gas tragedy has created a huge awareness for HAZOPS and loss prevention. Even the Uphaar cinema (Delhi) tragedy taught important lessons about safety in public places and work environs. As CMRSL is an early bird in this segment, Subba Rao claims that this risk management head start has given Chola MS enormous synergy to use as an USP and bundling its risk advisory with insurance, a definite cost-advantage for both client and insurer. "Chola MS Insurance clients get our services or vice-versa, a distinct cost advantage. For e.g., we were involved from the drawing board stage for telecom giant Hutch, and in design stage for Accenture." Even housing complexes of big companies use the services of CMSRL.

The best talent
The group's reputation for attracting the best talent in each field is reinforced when one meets Arun Agarwal, the 52-year-old MD of Chola MS General Insurance. Agarwal, who joined the group in 2002, when the company was still awaiting the requisite approvals, brought with him 27 years of insurance experience, with stints at Oriental Insurance, as member of faculty and research at the Pune National Insurance Academy and as VP, Tata-AIG before joining Chola MS. The author of several research papers, he has built up the core team and given momentum to the newly incorporated entity.

In just one year of operations, Chola MS has issued over 3 lakh policies in the wide spectrum of products: accident, engineering, health, liability, marine, property, travel, rural insurance and multi-line packages. The international strengths of Mitsui Sumitomo in terms of product innovation, training and marketing muscle will back Chola MS.

Talking about the evolution of general insurance, Agarwal says that its long history from 1973 with 108 players is no mean achievement. It is only the recent development of this sector opening up that has brought in new challenges. "For example, fairly early, we saw the potential in health insurance as well as travel. In our plan, even 3-4 hours is termed as hospital stay, as today a number of procedures do not require long stay. We have to tread carefully in travel insurance, as this is a price-conscious society. In terms of servicing vehicle insurance, any product is only as good as its service backing - we have 24 hours settlement from time of accident. We offer three great values: measurable benefits, risk management services and the backing of Mitsui Sumitomo. From being in seven cities in October 2002, we have now extended our presence to 16 locations; we also have franchises and agents. The ERP format with CRM model and our branding on 'service' in terms of quick reach (we have 2,400 hospitals in 250 cities, third party administered) for a diverse and disparate market, both rural and urban."

The MD's promise is well reflected in the latest performance results...the gross written premium is up from Rs 97 crore to Rs 169 crore and the company expects to break even this year. The other venture is its entry into the mutual fund arena. Started in 1996 as a joint venture with Cazenove of the UK, in 2001 Cholamandalam AMC Ltd (CAMC) became a subsidiary of Cholamandalam when the Murugappa group acquired the foreign stake. Heading the operations from Mumbai is Sashi Krishnan, CEO, who has been with the fund since 1999. "Our fund philosophy is to identify good companies that can become big players in the global arena. We do not believe in sector based approach alone, but a more stock-specific one. We also see a good story in mid cap companies, which will evolve into large cap ones. Small investors should invest more in equity, if not directly, then through the mutual fund route," he says.

Though the fund is a steady performer, with assets under management of a mere Rs 1,300 crore, one wonders what's the future of this mutual fund. Says a mutual fund player: "In an arena where size matters, it is considered a bit player. It will either have to take over some fund or get taken over."

Then there are the other arms, Cholamandalam Distribution Services (CDS) and CSec. While the former mobilises over Rs 2,500 crore annually through distribution of financial services products, both in-house and third party, the latter is a research and broking arm. Clearly, there seems to be an attempt to make Chola group a one-stop shop for all finance and investment needs, with insurance thrown in.

"A sound group promotes brand equity in all its forays," says Kishore Kumar, HDFC Bank. "The Murugappa group and the Chola brand have built up this reputation with great care. The group has consistently consolidated, looked for innovative ways to grow new business, given full responsibility to its professionals to grow and grow the enterprises they manage. In business, pedigree is a brand in its own right." Concludes Anandan: "Our challenge now is to leverage our strengths and sustain growth across all our businesses." With competition getting aggressive in its core business of truck financing, this lap of the rally is sure going to be gruelling for Chola.