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Mah Fin.: Strong performance continues
Jan 18, 2013

Mahindra Finance declared its results for the third quarter of the financial year 2012-13 (3QFY13). The company reported a 38% growth in income from operations while net profits have grown by 36% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Income from operations grows by 38% YoY in 3QFY13, and 45% in 9mFY13.
  • Advances grow by 39% in 9mFY13. Assets under management grow by 32% YoY.
  • Net NPA to total advances increase to 1.6% in 9mFY13 from 1.1% in 9mFY12.
  • Net interest margins increase to 7.3% in 9mFY13 from 6.7% in 9mFY12 despite higher interest costs. Spreads remained stable.
  • Bottomline grows by 45% YoY during 9mFY13 and 36% during 3QFY13.
  • Capital adequacy ratio stands at 19.8% at the end of 9mFY13 post the QIP infusion.

Consolidated performance snapshot
Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Income from operations 7,639 10,573 38.4% 20,042 29,098 45.2%
Interest expense 3,196 4,464 39.7% 8,008 12,066 50.7%
Net Interest Income 4,443 6,110 37.5% 12,034 17,032 41.5%
Net interest margin       6.7% 7.3%  
Other Income 66 47 -28.7% 142 138 -2.8%
Other Expense 1,582 2,055 29.9% 4,586 5,772 25.9%
Provisions and contingencies 555 887 59.9% 1,614 2,727 69.0%
Profit before tax 2,372 3,215 35.5% 5,977 8,671 45.1%
Tax 775 1,046 34.9% 1,957 2,850 45.6%
Profit after tax/ (loss) 1,597 2,169 35.8% 4,019 5,821 44.8%
Minority interest 4 7 81.3% 8 14 72.2%
Net Profit to equity shareholders 1,593 2,162 35.7% 4,011 5,807 44.8%
Net profit margin (%) 20.9% 20.4%   20.0% 20.0%  
No. of shares (m)         113.8  
Book value per share (Rs)*         386.4  
Price to book value (x)*         2.9  
* Book value as on 31st December 2012

What has driven the performance in 9mFY13?
  • The Society of Indian Automobile Manufacturers (SIAM) expects muted auto growth throughout FY13. In fact the industry body, recently further downgraded the growth in the automobile industry for FY13 to 0-2% from 1-3% projected in October 2012. However, for Mahindra Finance, which caters primarily to the semi-urban and rural markets this was a different growth story altogether.

  • The company saw a decent 12% YoY growth in new customer contracts since December '11. Despite higher lending rates, the lender still managed to grow its advances by 39% in 9mFY13. The company has added 32 more branches since FY12 and still has enough room to grow within the rural market. Most car manufacturers are looking at rural India to offset slowing growth in urban areas, and Mahindra Finance is thus a key beneficiary of this shift. Besides Mahindra vehicles and Maruti cars (for which it is the no 1 financier), the company is also seeing increased demand from other manufacturers like Hyundai, Ford and Toyota. The company has been seeing increased volumes from its direct marketing initiatives.

  • NIMs continued to improve and stood at 7.3% at the end of 9mFY13, compared to 6.7% previously despite higher borrowing costs. Net spread increased to 5.2% from 5.1% previously.

    Dynamic growth...
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Advances 178,501   247,856   38.9%
    Borrowings 139,703   193,470   38.5%
    Secured 105,691 75.7% 146,475 75.7% 38.6%
    Unsecured 34,012 24.3% 46,995 24.3% 38.2%
    Credit borrowing ratio 127.8%   128.1%    

  • Mahindra Finance, which was once predominantly a financer of tractors and utility vehicles sold by M&M, now has an almost 50:50 mix of M&M and non M&M vehicles, thus de-risking its portfolio to some extent. The company has also seen increased traction from its used vehicle and construction equipment portfolio.

    AUM mix
    (%) 9mFY12 9mFY13
    Auto / utility vehicles (M&M) 30 29
    Tractors (M&M) 20 19
    Cars/Others** 31 32
    CVs and construction equip. 12 13
    Used vehicles & others 7 7

  • NPAs (non-performing assets) at the gross level moved lower from 4.1% in 9mFY12 to 4% in 9mFY13. Also, despite higher provisioning, the net NPAs increased to 1.6% at the end of 9mFY13 from 1.1% earlier. The provision coverage ratio came down to 62.3% from 74.4% earlier. Additional provisioning was taken in the unsecured lending space i.e. on personal loans and two wheelers on a conservative basis.

  • Its capital adequacy stands at 19.8% currently. The company recently completed a qualified institutional placement (QIP) where it was able to raise Rs 8.7 bn and give it some capital headroom for growth.

What to expect?
At the current price of Rs 216 (adjusted for stock split), the stock is trading at a multiple of 2.2 times its FY15 adjusted book value. Mahindra Finance has seen robust growth, despite a tough environment and high interest rates and the management continues to be bullish on the rural space over the next few years. However, the heavy commercial vehicle space, especially certain segments like tippers, container and goods vehicles have seen declining demand on account of limited construction activity on account of slowing GDP growth.

Despite seeing some slippages this quarter, the company has maintained superior asset quality and continues to improve its operating efficiency. The company has appointed 125 supervisory officers in order to monitor asset quality. Mahindra Finance has also started being more conservative on securitization, despite RBI new guidelines on the same. It has stopped up-fronting income on securitization income, and has not undertaken any transactions so far this year, but expects around Rs 10 bn in the same by the end of the year.

Since, the stock has already crossed our target price mentioned in our HOLD report .The stock is also trading very close to our revised target price of Rs 228 (after factoring in the QIP, the latest results and adjusted for the stock split), we see limited upside and maintain a Sell on the stock.

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