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Mah Finance: Reaping rural prosperity
Apr 23, 2010

Mahindra Finance declared its FY10 results. The company has reported a 12% YoY and 61% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Interest income grows by 12% YoY and 19% YoY during FY10 and 4QFY10 respectively.
  • Advances grow by 24% YoY on the back of 22% YoY growth in assets under management. Incremental disbursements largely towards utility vehicles and cars.
  • Value of assets financed grew 42% YoY over the past 12 months.
  • Net interest margins dropped from 6.9% in FY09 to 6% in FY10.
  • Bottomline grows by 61% YoY during FY10; 30% YoY in 4QFY10 largely on the back of growth in other income and write back of provisionig
  • Capital adequacy ratio healthy at 18.5% at the end of FY10.


Standalone performance snapshot
Rs (m) 4QFY09 4QFY10 Change FY09 FY10 Change
Interest income 3,893 4,636 19.1% 13,648 15,308 12.2%
Interest expense 1,272 1,240 -2.5% 5,099 5,017 -1.6%
Net Interest Income 2,621 3,396 29.5% 8,549 10,291 20.4%
Net interest margin       6.9% 6.0%  
Other Income 83 114 37.3% 198 380 91.9%
Other Expense 516 974 88.8% 2,581 3,151 22.1%
Provisions and contingencies 483 367 -24.0% 2,911 2,314 -20.5%
Profit before tax 1,705 2,169 27.2% 3,255 5,206 59.9%
Tax 624 765 22.6% 1,111 1,762 58.6%
Profit after tax/ (loss) 1,081 1,404 29.8% 2,144 3,444 60.6%
Net profit margin (%) 27.8% 30.3%   15.7% 22.5%  
No. of shares (m)       95.7 96.0  
Book value per share (Rs)*         179.9  
Price to book value (x)*         2.3  
* Book value as on 31st March 2010

What has driven performance in FY10?
  • The 30% YoY growth in new customer contracts of Mahindra Finance is testimony to the fact that the institution has been able to reap the benefit of higher income in the hinterlands. With the economic recovery showing its colour on the automobile sector, the resurgence in demand for car and CV loans also offered the kicker to Mahindra Financeís FY10 performance. The company has outperformed our estimates on the asset growth as well as other income front this fiscal.

    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 40% in March 2009 to 35% in March 2010. The proportion of disbursements towards cars (29%) and commercial vehicles (7%) increased while that towards tractors dropped marginally from 22% to 21% during the period.

    Cautious growth...
    (Rs m) FY09 % of total FY10 % of total Change
    Advances 68,706   84,865   23.5%
    Borrowings 52,203   65,250   25.0%
    Secured 44,819 85.9% 54,097 82.9% 20.7%
    Unsecured 7,384 14.1% 11,153 17.1% 51.0%
    Credit borrowing ratio 131.6%   130.1%    

  • 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
    (%) FY09 FY10
    Auto / utility vehicles 40 35
    Tractors 22 21
    Cars 25 29
    Commercial vehicles 6 7
    Used vehilces & others 7 8

  • 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.

  • 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 8.7% in FY09 to 6.4% in FY10. Also, due to higher provisioning, the net NPA were lower at 0.9% at the end of FY10 as compared to 2.6% of advances at the end of FY09. The provision coverage ratio was 86% at the end of FY10. 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 417, the stock is trading at a multiple of 2.2 times our estimated FY12 adjusted book value. We will have to revise our estimates for the company taking into consideration the higher asset growth in FY10. Also, the improved other income potential will 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 will soon update our target price for the stock.

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