Mahindra Fin.: Significant margin improvement - Views on News from Equitymaster

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Mahindra Fin.: Significant margin improvement

Jan 24, 2012

Mahindra Finance declared its results for the third quarter of the financial year 2011-12 (3QFY12). The company reported a 42% growth in interest income while net profits have grown by 28% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Interest income grows by 42% YoY in 3QFY12, and 41% in 9mFY12.
  • Advances grow by 48% in 9mFY12. Assets under management grow by 40% YoY.
  • Net NPA to total advances remain at 1.1% in 9mFY12.
  • Net interest margins increase to 6.7% in 9mFY12 from 5.7% in 9mFY11 despite higher interest costs. However there was some impact on spreads which declined to 5.1% from 5.6% previously.
  • Bottomline grows by 23% YoY during 9mFY12 and 28% during the 3QFY12.
  • Disbursements saw a buoyant growth of 36% YoY in 9mFY12.

Consolidated performance snapshot
Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 5,398 7,673 42.1% 14,301 20,169 41.0%
Interest expense 1,829 3,196 74.7% 4,688 8,008 70.8%
Net Interest Income 3,569 4,477 25.4% 9,612 12,160 26.5%
Net interest margin       5.7% 6.7%  
Other Income 76 86 13.0% 232 300 29.6%
Other Expense 1,195 1,636 36.9% 3,403 4,720 38.7%
Provisions and contingencies 590 555 -6.0% 1,535 1,764 14.9%
Profit before tax 1,860 2,372 27.5% 4,906 5,977 21.8%
Exceptional items - -   - -  
Tax 614 775 26.3% 1,626 1,957 20.4%
Profit after tax/ (loss) 1,246 1,597 28.1% 3,280 4,020 22.5%
Minority interest 3 4 18.0% 8 8 9.8%
Net Profit to equity shareholders 1,243 1,593 28.2% 3,272 4,011 22.6%
Net profit margin (%) 23.0% 20.8%   22.9% 19.9%  
No. of shares (m)         104.0  
Book value per share (Rs)*         280.9  
Price to book value (x)*         2.4  
* Book value as on 31st December 2011

What has driven performance in 9mFY12?
  • The auto sector has seen a lackluster performance so far this year, far below expectations. However, Mahindra Finance’s growth, that caters primarily to the semi-urban and rural markets, was a different story altogether. The company saw a robust 28% YoY growth in new customer contracts. This is a testament to the fact that the institution has been able to reap benefits of higher cash flows in rural India. Despite multiple rate hikes, the lender still managed to grow its advances by 47.7% in 9mFY12. The company has added 10% more branches over the same period last year. This is in line with the company’s strategy to increase its delivery channels in order to fuel growth. 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, the company is also seeing increased demand from other manufacturers like Hyundai and Toyota.

    Dynamic growth...
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Advances 120,850   178,497   47.7%
    Borrowings 91,278   139,703   53.1%
    Secured 64,175 70.3% 105,691 75.7% 64.7%
    Unsecured 27,103 29.7% 34,012 24.3% 25.5%
    Credit borrowing ratio 132.4%   127.8%    

  • Mahindra Finance, which was once predominantly a financer of tractors and utility vehicles sold by M&M, now has an almost 47:53 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.

    Disbursement mix
    (%) 3QFY11 3QFY12
    Auto / utility vehicles (M&M) 30 27
    Tractors (M&M) 22 20
    Cars/Others** 33 32
    CVs and construction equip. 6 11
    Used vehicles & others 9 10
    ** Others include non-M&M vehicles
    CVs stand for commercial vehicles

  • NPAs (non-performing assets) at the gross level moved lower from 5.6% in 9mFY11 to 4.1% in 9mFY12. Also, due to higher provisioning, the net NPAs remained at 1.1% at the end of 9mFY12. The provision coverage ratio was 74.4% at the end of the period. The company has invested in a legal system in a number of states, which has helped it recover some of its bad loans. This has helped the company maintain asset quality even in a tough environment.

  • Its capital adequacy stands at 17.5% currently. However MMFS’ board has approved the issue of preference shares of upto Rs 500 m. This will help increase the Tier 2 headroom for the company. The company has Tier 1 capital of 14.6% currently, which is comfortable enough for the time being. However if it gets a chance to raise equity capital at a favorable price, it may opt to do so.

What to expect?
At the current price of Rs 678, the stock is trading at a multiple of 2 times our estimated FY14 adjusted book value. The company has seen robust growth, despite a tough environment and high interest rates. While its rural customers were not as affected by the rate hikes, Mahindra Finance saw a huge spike in its cost of funds. Margins, however, did not contract as lending yields were also higher. Nevertheless, if RBI cuts key interest rates, the company will benefit from borrowing costs coming down as its asset book is on a fixed rate basis. The company is also seeing sufficient liquidity on its liabilities side. The company has also maintained asset quality and has continued to improve its operating efficiency.

However, with the economy set for a slowdown, and the RBI revising its projections for GDP growth downwards to 7%, rural cash flows may get affected. Thus, going forward we expect loan growth to moderate somewhat. However, in light of its better than expected performance both on the balance sheet and profit front, we will have to revise our estimates for Mahindra Finance upwards.

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