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Mahindra Finance: Advances on a slow track - Views on News from Equitymaster
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Mahindra Finance: Advances on a slow track
Jan 24, 2009

Performance summary
  • Interest income grows by 11% YoY during 3QFY09, 15% YoY during 9mFY09.
  • Disbursements grow by 7% YoY during the nine-month period, reflecting a slowdown in the economy and demand for loans.
  • Bottomline grows by a marginal 6% YoY during the quarter and at and equal rate during the nine-month courtesy the decline in other income for both the periods.

Consolidated performance snapshot
Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest income 3,215 3,577 11.3% 8,584 9,878 15.1%
Interest expense 1,263 1,415 12.1% 3,378 3,833 13.5%
Net Interest Income 1,953 2,163 10.7% 5,205 6,045 16.1%
Net Interest Margin % 6.6% 6.9%
Other Income 44 31 -28.6% 142 111 -21.5%
Other Expense 620 699 12.8% 1,882 2,079 10.4%
Provisions and contingencies 710 788 11.0% 1,865 2,368 27.0%
Profit before tax 667 707 5.9% 1,600 1,710 6.9%
Tax 236 251 6.2% 558 613 9.8%
Profit after tax/ (loss) 431 456 5.7% 1,042 1,097 5.3%
Net profit margin (%) 13.4% 12.7%   12.1% 11.1%  
No. of shares (m)       86.0 96.9  
Book value per share (Rs)*         146.6  
Price to book value (x)*         1.4  
* Book value as on 31st December 2008

What has driven performance in 3QFY09?
  • The excess inventory pile up in the automobile sector, economic slump and lower demand for vehicles as well as tractors have all added up to poor demand for loans from NBFCs like Mahindra Finance. Mahindra Finance, which is predominantly a financer of tractors and utility vehicles sold by M&M, saw the proportion of disbursements towards utility vehicles increase from 34% in March 2008 to 41% in December 2008. This was primarily due to the new launches in this segment. The proportion of disbursements towards cars (24%) and commercial vehicles (7%) remained unchanged while that towards tractors dropped marginally from 24% to 22% during the period.

  • Mahindra Finance consciously adopted a cautious stance in the previous quarter with regard to margins and asset quality and grew its advance base by merely 5% YoY in 9mFY09. Also despite shifting its focus from tractor / farm lending to utility vehicle financing, it managed to improve its net interest margins (NIMs) due to the relatively lower cost of funds in the third quarter. Typical to their nature, the tractor loans yield the company superior spreads (in the range of 12% to 13%) but at the same time pose some delinquency problems. This led to the company compromising its margins for safer quality of assets.

    Slowdown imminent...
    (Rs m) 3QFY08 % of total 3QFY09 % of total Change
    Advances 67,237   70,857   5.4%
    Borrowings 56,931   53,737   -5.6%
    Secured 44,719 78.5% 45,209 84.1% 1.1%
    Unsecured 12,212 21.5% 8,528 15.9% -30.2%
    Credit borrowing ratio 118.1%   131.9%    

  • Mahindra Finance’s other income base failed to grow in this quarter as the insurance distribution subsidiary along with the mutual fund distribution business and the rural home financing business (loan to asset of 20%) that are currently operating on a very low base, failed to contribute due to lower disposable income in rural households as a result of the high interest and inflation levels.

  • The rise in interest rates have led to higher delinquencies for the NBFC in the past few quarters. The NPAs at the gross level moved up from 8.7% to 10.1% during the first nine months of FY09. However, due to higher provisioning and lower asset growth, the net NPA were lower at 3.8% as compared to 4.1% of advances. The provision coverage ratio was 64.6% at the end of 9mFY09. Also, notwithstanding the shift from tractors to cars and utility vehicles, the company's asset quality will continue to be subject to slippages due to this reason.

What to expect?
At the current price of Rs 206, the stock is trading at a multiple of 1.5 times our estimated FY11 adjusted book value. We have revised our estimates for the company taking into consideration the weak outlook for the automobile sector. Nonetheless, its niche presence in the high-yielding tractor and used vehicle financing business earns Mahindra Finance an edge over its peers in terms of net interest margins. Further the subsidy in borrowing costs for funding farm equipments provides substantial cushion in a rising interest rate scenario. Also, the NBFC's well-entrenched reach and opportunity of financing Punjab Tractors' vehicles offers some upsides in the longer term.

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