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Mah Fin.: Auto demand filters into profits - Views on News from Equitymaster

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Mah Fin.: Auto demand filters into profits
Feb 2, 2010

Performance summary
  • Interest income grows by 9% YoY and 12% YoY during 9mFY10 and 3QFY10 respectively.
  • Advances grow by 11% YoY on the back of 16% YoY growth in assets under management. Incremental disbursements largely towards utility vehicles and cars.
  • Value of assets financed grew 28% YoY over the past 12 months.
  • Net interest margins remain stable at 6.9%; better credit rating from rating agencies on long term debt.
  • Bottomline grows by 92% YoY during 9mFY10; 113% YoY in 3QFY10 largely on the back of growth in other income and curtailment of operating expenses.
  • Capital adequacy ratio healthy at 19.4% at the end of 9mFY10.


Consolidated performance snapshot
Rs (m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Interest income 3,532 3,939 11.5% 9,755 10,672 9.4%
Interest expense 1,412 1,362 -3.5% 3,827 3,777 -1.3%
Net Interest Income 2,120 2,577 21.6% 5,928 6,895 16.3%
Net interest margin       6.9% 6.9%  
Other Income 34 81 138.2% 115 267 132.2%
Other Expense 1,445 1,230 -14.9% 4,329 4,052 -6.4%
Provisions and contingencies 22 26 18.2% 62 71 14.5%
Profit before tax 687 1,402 104.1% 1,652 3,039 84.0%
Tax 242 453 87.2% 587 997 69.8%
Profit after tax/ (loss) 445 949 113.3% 1,065 2,042 91.7%
Net profit margin (%) 12.6% 24.1%   10.9% 19.1%  
No. of shares (m)       95.5 95.8  
Book value per share (Rs)*         164.7  
Price to book value (x)*         1.6  

What has driven performance in 9mFY10?
  • With the economic recovery showing its colour on the automobile sector, the resurgence in demand for car and CV loans offered the kicker to Mahindra Financeís 3QFY10 performance. Mahindra Finance, which is predominantly a financer of tractors and utility vehicles sold by M&M, saw most of its incremental disbursements go to cars and commercial vehicles. The company saw the proportion of disbursements towards utility vehicles drop from 41% in December 2008 to 36% in December 2009. The proportion of disbursements towards cars (29%) and commercial vehicles (8%) increased while that towards tractors dropped marginally from 22% to 20% during the period.

    Cautious growth...
    (Rs m) 9mFY09 % of total 9mFY10 % of total Change
    Advances 70,935   78,855   11.2%
    Borrowings 53,737   61,292   14.1%
    Secured 45,209 84.1% 47,406 77.3% 4.9%
    Unsecured 8,528 15.9% 13,886 22.7% 62.8%
    Credit borrowing ratio 132.0%   128.7%    

  • Mahindra Finance consciously adopted a cautious stance in the past few quarters with regard to margins and asset quality. 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.

    Disbursement mix
    (%) 9mFY09 9mFY10
    Auto / utility vehicles 41 36
    Tractors 22 20
    Cars 24 29
    Commercial vehicles 7 8
    Refinance 6 7

  • Mahindra Financeís other income base grew appreciably 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, contributed handsomely due to improved disposable income in rural households as a result of the low interest rates and stimulus packages. Loans sanctioned under rural home financing were to the tune of Rs 1.1 bn at the end of December 2009.

  • The lower interest rates led to lower delinquencies for the NBFC in the past few quarters. The NPAs at the gross level moved lower from 10.1% in 9mFY09 to 8.7% in 9mFY10. Also, due to higher provisioning and lower asset growth, the net NPA were lower at 2.3% at the end of 9mFY10 as compared to 3.8% of advances at the end of 9mFY09. The provision coverage ratio was 75% at the end of 9mFY10. Having said that, notwithstanding the shift from tractors to cars and utility vehicles, we believe that the company's asset quality may continue to be subject to slippages as long as the underlying economic risks (interest rates etc.) persist.

What to expect?
At the current price of Rs 318, the stock is trading at a multiple of 1.7 times our estimated FY12 adjusted book value. We had revised our estimates for the company taking into consideration the weak outlook for the automobile sector. However, the improved other income potential will also need to be looked into. Further the subsidy in borrowing costs for funding farm equipments provides the company substantial cushion in terms of margins. Control over asset quality and extending its advance base beyond parent M&Mís portfolio will be the key to the companyís growth in the longer term. We retain our positive outlook on the stock from a long term perspective

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