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Mahindra Finance: Sluggish year - Views on News from Equitymaster
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Mahindra Finance: Sluggish year
Apr 23, 2008

Performance summary
  • Interest income grows by 45% YoY in FY08 on the back of 13% YoY growth in advances.
  • Net interest margin improves to 11.9% in FY08 (9.5% in FY07) due to increased spreads on tractor loans.

  • Delinquency rates rise with higher dependence on tractor loans.

  • Cost to income ratio reduces to 31.6% from 36.3% in FY07.

  • Bottomline grows by 30% YoY aided by higher fee income, lower effective tax rates.

  • Board has recommended dividend of 45%.

Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest income 2,622 3,548 35.3% 8,291 12,058 45.4%
Interest expense 958 1,180 23.2% 3,241 4,560 40.7%
Net Interest Income 1,664 2,368 42.3% 5,050 7,498 48.5%
Net interest margin (%)       9.5% 11.9%  
Other Income 30 65 116.7% 127 210 65.4%
Other Expense 543 649 19.5% 1,881 2,438 29.6%
Provisions and contingencies 263 620 135.7% 1,268 2,549 101.0%
Profit before tax 1,151 1,784 55.0% 3,296 5,270 59.9%
Tax 309 409 32.4% 699 949 35.8%
Profit after tax/ (loss) 579 755 30.4% 1,329 1,772 33.3%
Net profit margin (%) 22.1% 21.3%   16.0% 14.7%  
No. of shares (m)       86.0 96.9  
Book value per share (Rs)         135.5  
P/BV (x)*         2.2  
*Book value as on 31st March 2008

What has driven performance in FY08?
  • With the economic slowdown being inevitable and the outlook for the auto-manufacturing sector being muted, auto financers are not having their growth prospects very stable in the medium term. The organised sector accounts for 71% of the entire auto finance market with the balance being serviced by the local moneylenders. The total organised auto finance market is expected to grow at a CAGR of 15% over the period FY08 to FY12 (SIAM, CRISINFAC estimates) against an earlier estimate of 15%.

    Mahindra Finance managed to grow its advance base by 13.3% YoY in FY08, grossly under-performing our earlier estimate of 23% for the fiscal (30% in FY07). Having said that, due to the priority sector status accorded to rural / farm lending, most of the growth came from the tractor loans segment that comprised nearly 33% of the company’s advance book (25% in FY07). Mahindra Finance is able to garner approximately 3% discount on its borrowing cost for tractor lending and 1% discount for funding utility vehicles. Having said that, the company has kept an arms-length relationship with its parent in terms of commercial transactions and has an internal cap of financing upto 40% of M&M's sales.

    Typical to their nature, the tractor loans yielded the company superior spreads (in the range of 12% to 13%) but at the same time posed some delinquency problems.

    Slowdown imminent...
    (Rs m) FY07 % of total FY08 % of total Change
    Advances 58,655   66,435   13.3%
               
    Borrowings 49,400   50,682   2.6%
    Secured 45,803 92.7% 46,135 91.0% 0.7%
    Unsecured 3,597 7.3% 4,547 9.0% 26.4%
    Credit borrowing ratio 118.7%   131.1%    

  • Mahindra Finance’s fee income base continued to improve this fiscal with the insurance subsidiary posting profits to the tune of Rs 50 m. 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 are expected to aid the growth on this front going forward.

  • The rise in interest rates has impacted the incremental demand for tractors and farm equipments in recent months due to the uneven rainfall last year. Being the largest player financing this segment, Mahindra Finance's asset book remains susceptible to the vagaries of rainfall distribution in the arable areas. Also, notwithstanding the shift from tractors to cars and commercial vehicles, the company's asset quality will continue to be subject to slippages due to this reason. The delinquency in tractor loans has actually increased the net NPA to advance ratio from 2.6% in FY07 to 2.9% in FY08, and we believe that the same will continue to linger above 2% until FY10 despite higher provisioning.

What to expect?
At the current price of Rs 295, the stock is trading at 1.8 times our estimated FY10 adjusted book value. We may have to revise 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 substantial upsides in the longer term.

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