KMFL: Strong operating performance

Kotak Mahindra Finance (KMFL) managed to curtail decline in income from operations in the December '01 quarter. From a 15% fall in topline in the September quarter, the company's income from operations in the third quarter declined by 5%. Reduction in operating costs and lower interest expenses enabled the company in trimming the fall in net income during the first nine months of FY02.

The company's asset finance business performed well during the third quarter with over 50% rise in disbursements. It's lending activities accounted for 75% of total revenues in the third quarter. Lower interest rates fueled the vehicle financing business of the company. KMFL also reaped good revenues from its investments in other ventures including investment banking, mutual funds and insurance. 63% of the company's pre tax profits were from these investments. Its subsidiary model has proved to be successful.

During the first nine months of FY02, KMFL's interest expenses were lower by 23% and depreciation charge declined by 12%. This, coupled with a 56% fall in advertisement expenses (8% of other expenses) inflated its operating margins to 23% from 14% in the comparable previous period.

A 64% jump in operating profits was however, compensated by a 7 fold rise in provisions and contingencies figure. Consequently, KMFL's profits in the first nine months of FY02 declined by 4%.

Among the new developments, the company has recently received approval from the RBI for converting into a bank. This is positive for the company as it would now be able to leverage on low cost funds (saving and current account deposits). The banking business has a lot of synergies associated with the lending business of the company with its current client base of about 150,000. It will have an opportunity to cross sell its products after converting into bank, which would boost its sluggish topline growth.

At the current market price of Rs 103, KMFL is trading on a P/E of 13x and price to book value ratio of 1.2x 9m FY02 annualised earnings. The stock has witnessed a sharp run-up in the last two months, rising from the level of about Rs 50 in December 2001. This was after the company has been given approval by the RBI to convert into a bank. KMFL's current valuations are in line with the second rung private banking stocks.