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Mah Fin.: Credit costs drag profits
Apr 25, 2014

Mahindra Finance declared its results for the fourth quarter (4QFY14) and the financial year 2013-14. The company reported l6.7% YoY growth in net interest income while net profits have declined by 2.8% YoY during 4QFY14. The profit for FY14 grew 3.0% YoY. Here is our analysis of the results.

Performance summary
  • Income from operations grows by robust 23.7% YoY in 4QFY4 and the net interest income by mere 16.7% YoY.
  • The assets under management (AUM) grow by healthy 22.3% YoY during the quarter on standalone basis.
  • Bottom-line declines by 2.8% YoY during 4QFY14 on account of higher provisions.
  • The gross NPAs have gone up to 4.4% during FY14 from 3.0% in FY13. The net NPAs have also spiked to 1.9% QFY14 from 1.0% (FY13).
  • Cost to income ratio drops marginally to 31% in 4QFY14 from 33% in 4QFY13.
  • The capital adequacy ratio for the company stands at 18.0% as at the end of FY14.

Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Income from operations 11,852 14,662 23.7% 40,950 52,752 28.8%
Interest expense 4,640 6,244 34.6% 16,706 22,810 36.5%
Net Interest Income 7,212 8,418 16.7% 24,244 29,943 23.5%
Other Income 41 98 137.5% 180 253 40.9%
Other Expense 2,374 2,621 10.4% 8,321 10,391 24.9%
Provisions and contingencies 329 775 135.5% 2,882 5,190 80.1%
Profit before tax 4,550 5,121 12.5% 13,221 14,615 10.5%
Exceptional gains / losses 305     305 -  
Tax 1,388 1,721 24.0% 4,238 4,968 17.2%
Profit after tax/ (loss) 3,468 3,400 -2.0% 9,289 9,648 3.9%
Minority interest 4 35   19 104  
Net Profit to equity shareholders 3,464 3,365 -2.8% 9,270 9,544 3.0%
Net profit margin (%) 29.2% 23.0%   22.6% 18.1%  
No. of shares (m)         563.5  
Book value per share (Rs)*         89.6  
Price to book value (x)*         2.7  
* Book value as the end of March 2014
Exceptional gains pertain to gain from part sale of stake in insurance subsidiary

What has driven performance in FY14?
  • Earnings growth continues to slide for Mahindra Finance even in the last quarter of FY14 as auto industry volumes took a toll. Moreover, asset quality pressures have been daunting for the company for quite some time. The higher credit costs dragged the profitability for the quarter and the full year profit growth too remained sedate. Sensing the asset quality challenges and auto industry sluggishness, we had remained conservative on our estimates. Further, slightly lower operating expenses aided the company to surpass our FY14 estimates on the bottom-line front.

  • The net interest income grew at a healthy pace reporting 16.7% YoY growth during 4QFY14. However, the disbursements for the quarter continued to remain weaker. While the assets under management grew by robust 22.3% YoY, the loan book suffered. The pressures from the southern belt of the nation and the drop in auto volumes especially the stress from the commercial vehicles segment restricted buoyancy in volumes for the company. Not surprisingly, the AUM share coming from commercial vehicles segment has dropped albeit moderately on YoY basis. More importantly, the company is on the verge of exiting HCV segment with the decline in volumes. Lastly, with the subdued economic environment, the demand for pre-owned vehicle segment has picked up.

    Strong AUM growth...
    (Rs m) FY13 FY14 Change
    Assets under management 279,131 341,331 22.3%
    Advances 129,198 157,795 -18.1%
    Borrowings 130,153 169,032 29.9%
    Credit borrowing ratio 121.2% 76.4%  
    Note: Numbers are on standalone basis

    AUM mix
    (%) FY13 FY14
    Auto / utility vehicles (M&M) 28 29
    Tractors (M&M) 19 19
    Cars and Non M&M UVs, Tractors & SCVs 24 24
    Commercial vehicles and construction equip. 17 15
    Used vehicles & others 12 13

  • Weak disbursements and lower volumes have led to contraction of spreads for Mahindra Finance during FY14. Moreover, spike in interest costs marred the net interest margins for the full year. The spreads were seen down from higher levels of 10.6% in FY13 to 9.9% in FY14; thanks to the higher borrowing costs. Also lower yields on assets restricted the margins expansion during the year gone by.

  • Other income was another major parameter to boost the profitability for the company during FY14. The company reported whopping 138% YoY growth during 4QFY14 and healthy 41% YoY growth during FY14.

  • The non-performing assets (NPA) for the company have shot up during the FY14. However, what is more disappointing is that the recoveries have remained lower. The gross NPAs have been trending higher and stood at 4.4% during FY14, up from 3.0% in FY13. The net NPAs too have got closer to 2.0% levels during FY14. On sequential basis, the NPAs for 4QFY14 have improved. However, the provision coverage ratio has slid to 59.0% levels in FY14 from higher levels of 65.9% in FY13. We have estimated NPAs around 4% for FY15 and have also factored higher credit costs for the ensuing year. That said, given the change in loan mix and paring down of risky assets backed by improved recoveries will help the company to contain the asset quality pressures, going forward.
What to expect?
At the current price of Rs 245, the stock is trading at a multiple of 2.2 times our estimated FY16 adjusted book value.

Subdued economic activity, sluggish auto market and business cyclicality have been the major dampeners to the earnings growth of Mahindra Finance. While the asset quality pressures are here to stay, adequate recoveries could arrest further slippages. Having said that, paring down of higher yielding risky assets would also put margins to test.

Mahindra Finance, however, is rightly positioned from the turnaround in the macro economy and the government’s continued rural and semi-urban focus. While the medium-term pressures remain, we recommend investors to HOLD on the stock and not buy more at current levels. Please ensure that no stock forms more than 5% of your portfolio.

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