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Mah Fin.: Riding the rural income wave - Views on News from Equitymaster

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Mah Fin.: Riding the rural income wave
Apr 26, 2011

Mahindra Finance declared its results for the fourth quarter of financial year 2010-2011 (4QFY11). The company has reported 31% YoY growth in income from operations and 39% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Income from operations grows by 31% YoY and 30% YoY during FY11 and 4QFY11 respectively.
  • Advances grow by 42% YoY on the back of 41% YoY growth in assets under management.
  • Value of assets financed grows 62% YoY over the past 12 months.
  • Net interest margins drops marginally from 6.0% in FY10 to 5.8% in FY11.
  • Bottomline grows by 39% YoY during FY11 and 15% YoY in 4QFY11 largely on the back of growth in net interest income and write back of provisioning.
  • Capital adequacy ratio remains healthy at 20.3% at the end of FY11.
  • Mahindra Finance declares a dividend of Rs 10 per equity share, implying a dividend yield of around 1.3%.

Consolidated performance snapshot
Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Income from operations 4,726 6,134 29.8% 15,612 20,435 30.9%
Interest expense 1,247 1,974 58.3% 5,028 6,662 32.5%
Net Interest Income 3,479 4,161 19.6% 10,584 13,773 30.1%
Net interest margin       6.0% 5.8%  
Other Income 103 77 -25.5% 344 309 -10.2%
Other Expense 993 1,459 47.0% 3,208 4,862 51.6%
Provisions and contingencies** 368 208 -43.6% 2,319 1,743 -24.8%
Profit before tax 2,222 2,571 15.7% 5,401 7,477 38.4%
Tax 782 915 17.0% 1,840 2,541 38.0%
Minority interest 2 1 -21.0% 3 9 226.6%
Profit after tax/ (loss) 1,438 1,655 15.1% 3,558 4,928 38.5%
Net profit margin (%) 30.4% 27.0%   22.8% 24.1%  
No. of shares (m)       96.9 104.0  
Book value per share (Rs)*         242.8  
Price to book value (x)*         3.2  
* Book value as on 31st March 2011    ** Includes 0.25% standard asset provisioning as per RBI regulations

What has driven performance in FY11?
  • The robust 1.7 times growth in new customer contracts of Mahindra Finance is a testament to the fact that the institution has been able to reap the benefits of rural buoyancy. This helped the company report growth numbers, despite a rising interest rate cycle. Its customers have not been hurt by rising interest rates, as their cash flows have increased due to the NREGA (National Rural Employment Guarantee Act) scheme, good monsoons, as well as additional employment through infrastructure projects being executed across the country.

  • The company saw a 42% YoY growth in advances during FY11. It also added around 88 new branches during the year to be able to service a bigger customer base. This growth in advances came in slightly higher than our estimates. We clearly do not see the current growth rates being sustainable over the longer term.

    Dynamic growth...

    (Rs m) FY10 % of total FY11 % of total Change
    Advances 89,024   126,692   42.3%
               
    Borrowings 65,250   97,846   50.0%
    Secured 54,097 82.9% 84,349 86.2% 55.9%
    Unsecured 11,153 17.1% 13,497 13.8% 21.0%
    Credit borrowing ratio 136.4%   129.5%    

  • Mahindra Finance, which was once predominantly a financer of tractors and utility vehicles sold by M&M, now has an almost 50:50 mix of M&M and non M&M vehicles, de-risking its portfolio to some extent. It saw most of its incremental disbursements go to cars and non M&M utility vehicles. The company expects a big thrust in the pre owned vehicle, commercial vehicles and construction equipment financing going forward. Financing the Mahindra Navistar range of trucks will also be a growth driver going forward.

    Disbursement mix
    (%) FY10 FY11
    Auto / utility vehicles 35 29
    Tractors (M&M) 21 22
    Cars and other non M&M vehicles 29 33
    CVs and Construction equip. 7 7
    Used vehilces & others 8 9
    CVs are Commercial vehicles

  • The company also completed a QIP (qualified institutional placement) in February, 2011 issuing 6.1 m shares at a price of Rs 695 per share. This helped increase its capital adequacy ratio to 20.3% in FY11 from 17.4% at the end of the previous quarter (9mFY11). We had earlier anticipated the company to complete its QIP in March 2011; however the company completed it earlier than expected.

  • NPAs (non-performing assets) at the gross level moved lower from 6.4% in FY10 to 4% in FY11. Also, due to higher provisioning, the net NPA were lower at 0.6% at the end of FY11 as compared to 0.9% of total assets at the end of FY10. The provision coverage ratio was maintained at 86.4% at the end of FY11. The company has invested in a legal system in a number of states, which has helped it boost recovery and cut down NPAs tremendously.

What to expect?
At the current price of Rs 774, the stock is trading at a multiple of 2.3 times our estimated FY13 adjusted book value. (Research pro subscribers can click here for the latest update on the company.)

With buoyancy in rural India, Mah. Finance, saw significant demand over the past year. It is a dominant player in the rural market for Maruti Suzuki. It is also trying to forge partnerships with Hyundai which will be growth drivers going forward. Its parentage with M&M will always be a strong support for the company, and new vehicle launches by the parent will help add to its book. The high yielding used-vehicle financing, as well as construction equipment and commercial vehicle financing will help increase future disbursements. Its rural housing segment is also extremely high potential in India, and is expected to increase its penetration into other states from 8 states currently. The recent QIP also helped recapitalise the financier, and it may not need to tap the capital markets for the next 1.5-2 years.

However, passing on higher rates to customers after the RBI policy review may lead to some slippages from customers who have already experienced a few rate hikes over the past. Increasing fuel prices will also pinch the customerís wallet along with rampant inflation. One can expect growth to slow for the company going forward, as there was a lot of pent up demand for vehicles in FY11, which is now expected to moderate. We will soon be revisiting our estimates for this stock in light of the capital addition as well as advance growth, etc.

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