Mahindra Finance: Dismal quarter - Views on News from Equitymaster

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Mahindra Finance: Dismal quarter

Jan 22, 2014

Mahindra Finance declared its results for the third quarter of the financial year 2013-14 (3QFY14). The company reported mere 0.9% YoY growth in net interest income while net profits have declined by 21.6% YoY during 3QFY14. The profit for 9mFY14 grew 6.4% YoY. Here is our analysis of the results.

Performance summary
  • Income from operations grows by 5.7% YoY in 3QFY4 and the net interest income by mere 0.9% YoY.
  • The assets under management (AUM) grow by healthy 28% YoY during the quarter on standalone basis.
  • Bottom-line declines by 21.6% YoY during 3QFY14 on account of higher provisions.
  • The gross NPAs have gone up to 4.8% during 3QFY14 from 4.1% in 3QFY13. The net NPAs have also spiked to 2.2% (3QFY14) from 1.6% (3QFY13).
  • Cost to income ratio drops marginally spiked to 38% in 3QFY14 from 34% in 3QFY13.
  • The capital adequacy ratio for the company stands at 18.6% during 3QFY14.

Financial performance: A snapshot
Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Income from operations 12,858 13,586 5.7% 29,093 38,091 30.9%
Interest expense 5,477 6,141 12.1% 12,066 16,566 37.3%
Net Interest Income 7,381 7,445 0.9% 17,027 21,525 26.4%
Other Income 49 46 -5.2% 138 155 12.0%
Other Expense 2,555 2,864 12.1% 5,942 7,770 30.8%
Provisions and contingencies 1,286 1,828 42.1% 2,552 4,415 73.0%
Profit before tax 3,589 2,800 -22.0% 8,671 9,494 9.5%
Exceptional gains / losses       - -  
Tax 1,236 951 -23.0% 2,850 3,247 13.9%
Profit after tax/ (loss) 2,353 1,849 -21.4% 5,821 6,247 7.3%
Minority interest 28 25   14 68  
Net Profit to equity shareholders 2,325 1,824 -21.6% 5,807 6,179 6.4%
Net profit margin (%) 18.1% 13.4%   20.0% 16.2%  
No. of shares (m)         563.0  
Book value per share (Rs)*         88.5  
Price to book value (x)*         2.9  
* Book value as the end of December 2013
Exceptional gains pertain to gain from part sale of stake in insurance subsidiary

What has driven performance in 3QFY14?
  • The December quarter (3QFY14) proved to be disappointing in terms of earnings growth and asset quality for Mahindra Finance. The company succumbed to the subdued conditions particularly in the southern market, and reported lower disbursements. As a result the net interest income failed to make a mark. Moreover, higher provisions and lower non-interest income dragged the profitability for the company. That said, the assets under management reported a healthy 28% YoY growth for the quarter.

    Strong AUM growth...
    (Rs m) 3QFY13 3QFY14 Change
    Assets under management 256,452 328,583 28.1%
    Advances 133,655 174,843 30.8%
    Borrowings 119,929 160,213 33.6%
    Credit borrowing ratio 111.4% 109.1%  
    Source: Company presentation

  • The interest income for the company grew by mere 0.9% YoY during 3QFY14. The pressures were witnessed in the auto market and the southern pockets of the country. The maximum stress came from the commercial vehicles segment followed by three-wheelers. Besides, the re-possessed vehicle market also did not show up well due to unfavorable pricing. However, the local market has remained sanguine and is expected to continue to contribute to the business growth going forward.

    AUM mix
    (%) 3QFY13 3QFY14
    Auto / utility vehicles (M & M) 29 27
    Tractors (M & M) 19 19
    Cars and Non M & M UVs, Tractors & SCVs 32 34
    Commercial vehicles and construction equip. 13 11
    Used vehicles & others 7 9

  • With poor income performance and higher interest costs, the spreads for the quarter shrink to 4.1% during 3QFY14 from higher levels of 5.1% during 3QFY13. Going forward, the margin pressures stand imminent given the subdued market conditions.

  • The other income for the quarter too disappointed and was down by 5.2% YoY during 3QFY14.

  • Expenses for the quarter have gone up primarily on account of certain one-off expenditure towards advertisement, legal amongst others. The operating costs for the quarter spiked 12.1% YoY during 3QFY14 and almost 31% YoY during the 9-month period of FY14. As a result, the cost-income ratio was seen up at 38% during 3QFY14 from 34% same period a year ago.

  • The biggest disappointment for Mahindra Finance came from the unexpected increase in bad loans primarily due to stress in the southern market and pressures emerging from the commercial vehicles and auto segment. Therefore, the recoveries for the quarter have been poor and as a result the accounts slipped into NPA category. The gross NPAs for the quarter stood at 4.8% during the December quarter of FY14, up from 4.1% a year ago. The coverage ratio, too, has dropped to 55.5% levels during 3QFY14 from 61.6% same period a year ago.
What to expect?
At the current price of Rs 254, the stock is trading at a multiple of 2.9 times our estimated FY16 adjusted book value.

There is no denying the fact that Mahindra Finance is grappling with asset quality pressures at this juncture. The significant exposure to the southern market and the distressed auto segment has exacerbated the credit quality pressures for the company. Moreover, owing to the cyclical nature of the business, the recoveries tend to be fluctuating and hence the volatility in bad loans is a seasonal feature. That said, the historical highs of 10% NPAs is ruled out and the company is focusing on collection efficiencies to arrest any further slippages.

Besides unfavorable market conditions, Mahindra Finance also faced pricing pressures that impacted the income profile of the company during the third quarter.

While the auto segment would continue to remain vulnerable, the company is confident of consistent performance of rural market. We believe that given the imminent risks, investors should wait for more margin of safety and not buy the stock at current levels.

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