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Mah Fin.: Benefiting from rural buoyancy
Jan 21, 2011

Mahindra Finance declared its 3QFY11 results. The company has reported a 34% growth in interest income while net profits have grown by 28% YoY. Here is our analysis of the results.

Performance summary
  • Interest income grows by 34% YoY 3QFY11, and 31% in 9mFY11.
  • Advances grow by 47% in the 9mFY11. Assets under management grow by 39% YoY.
  • Net NPA to total advances improve to 1.1% in 9mFY11 from 2.3% previously.
  • Net interest margins drop from 6.2% in 9mFY10 to 5.7% in 9mFY11 due to higher interest costs.
  • Bottomline grows by 55% YoY during 9mFY11 and 28% during the 3QFY11.
  • An exceptional item relating to 0.25% standard asset provisioning was provided on all outstanding standard assets. If not for this item normalized profits would have increased 68% YoY for 9mFY11 and 57% YoY for 3QFY11.
  • Disbursements saw a buoyant growth of 69% YoY in 9mFY11.


Consolidated performance snapshot
Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Interest income ††4,019 ††5,398 34.3% †† 10,887 †† 14,301 31.4%
Interest expense ††1,363 ††1,829 34.2% 3,781 4,688 24.0%
Net Interest Income ††2,656 ††3,569 34.4% 7,105 9,612 35.3%
Net interest margin       6.2% 5.7%  
Other Income †††69 †††76 10.7% ††††241 ††††232 -3.7%
Other Expense †734 ††1,195 62.7% 2,215 3,403 53.6%
Provisions and contingencies †531 305 -42.5% 1,951 1,250 -35.9%
Profit before tax ††1,459 ††2,145 47.0% 3,180 5,191 63.3%
Exceptional items ††††-†† 285   ††-†† ††††285  
Tax †487 614 26.2% 1,058 1,626 53.6%
Profit after tax/ (loss) †973 ††1,246 28.1% 2,121 3,280 54.6%
Net profit margin (%) 24.2% 23.1%   19.5% 22.9%  
No. of shares (m)       †††96.9 †††96.9  
Book value per share (Rs)*         211.5  
Price to book value (x)*         3.3  
* Book value as on 31st December 2010

What has driven performance in 9mFY11?
  • The robust 79% YoY growth in new customer contracts of Mahindra Finance is a testament to the fact that the institution has been able to reap benefits of higher cash flows in rural India. This has helped the company report growth numbers, despite a rising interest rate cycle. Its customers have not been hurt by rising interest rates, as their cash flows have increased due to the NREGA (National Rural Employment Guarantee Act) scheme, good monsoons, as well as additional employment through infrastructure projects being executed across the country.

  • Mahindra Financeís customers are more cash flow sensitive versus interest rate sensitive. The company has already passed on a 0.5% increase in lending rates (November 2010) and a further 0.5% hike in Jan 2011 to its customers. It may also further increase rates depending on the RBI monetary policy review this month and its competitors moves. Since Mahindra Finance is present in the semi-urban and rural areas, where not many players are competing, it does not face too much pressure on loan pricing. It is able to adjust its LTV (loan to value) ratio and its lending period in order to match its interest income to its customerís cash flows. Having said that, higher interest rates may cause some customers to either slip on payments or defer their purchases.

  • The company saw a 47% YoY growth in advances during 9mFY10. It also added around 95 new branches during the first 9 months of the year to be able to capture a bigger audience. But, we clearly do not see the current growth rates being sustainable for the longer term.

    Dynamic growth...
    (Rs m) 9mFY10 % of total 9mFY11 % of total Change
    Advances 79,216   116,357   46.9%
               
    Borrowings 61,281   91,278   48.9%
    Secured 47,527 77.6% 64,175 70.3% 35.0%
    Unsecured 13,754 22.4% 27,103 29.7% 97.1%
    Credit borrowing ratio 129.3%   127.5%    

  • 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. It saw most of its incremental disbursements go to cars and non M&M utility vehicles.

    (%) 3QFY10 3QFY11
    Auto / utility vehicles (M&M) 36 30
    Tractors (M&M) 20 22
    Cars/Others** 29 33
    Commercial vehicles 8 6
    Used vehicles & others 7 9
    ** Others include non-M&M vehicles

  • Mahindra Finance formed a Joint Venture in the US with a subsidiary of Rabobank Group called De Lage Landen Financial Services (DLLFS). DLLFS will have a 51% stake in the venture with Mahindra Finance having the remaining 49%. This is the companyís first foray outside India. The venture will provide wholesale inventory financing to US based tractor dealers and retail financing to customers as well on tractors and related implements.

  • NPAs (non-performing assets) at the gross level moved lower from 8.7% in 3QFY10 to 5.6% in 3QFY11. Also, due to higher provisioning, the net NPA were lower at 1.1% at the end of 3QFY11 as compared to 2.3% of total assets at the end of 2QFY10. The provision coverage ratio was 82.6% at the end of 3QFY11 (75% previously). The company has invested in a legal system in a number of states, which has helped it boost recovery and cut down NPAs tremendously.

  • Its capital adequacy ratio currently stands at 17.4% compared to 19.4% in 3QFY11. In order to increase its capital buffer the company plans to raise up to Rs 5.7 bn through a QIP (Qualified Institutional Placement) in March 2011.

What to expect?
At the current price of Rs 700, the stock is trading at a multiple of 2.2 times our estimated FY13 adjusted book value. (Research pro subscribers can click here for the latest update on the company.)

With buoyancy in rural India, Mahindra Finance, which is the preferred financier for Maruti saw significant demand. It finances around 10,000 Maruti cars and is a dominant player for Indiaís largest car manufacturer. It is also trying to forge partnerships with Hyundai and VW which will be growth drivers going forward. The high yielding used-vehicle financing, as well as construction equipment financing will also help increase future disbursements. Its rural housing segment is also extremely high potential in India, and is expected to increase its penetration into other states from 8 states currently.

However, passing on higher rates to customers after the RBI review may lead to some slippages from its customers who have already experienced two rate hikes in the past few months. Increasing fuel prices will also pinch the customerís wallet. This is especially for cars which are for customers own use, versus commercial purposes (ferrying people). We will soon be revisiting our estimates for this stock.

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