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Mahindra Finance: Cars and UVs save the CV blush - Views on News from Equitymaster

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Mahindra Finance: Cars and UVs save the CV blush

Apr 27, 2009

Performance summary
  • Interest income grows by 13% YoY during FY09, 10% YoY during 4QFY09
  • Advances grow by 3% YoY on the back of 8% YoY growth in assets under management. Incremental disbursements largely towards utility vehicles and cars.
  • Net interest margins improve by 0.2% to 6.9% in FY09 due to lower cost of funds in 2HFY09.
  • Bottomline grows by 21% YoY during FY09; 43% YoY in 4QFY09. Higher growth in profits in the fourth quarter is courtesy the growth in other income.
  • Capital adequacy ratio healthy at 19.5% at the end of FY09.

Consolidated performance snapshot
Rs (m) 4QFY08 4QFY09 Change FY08 FY09 Change
Interest income 3,548 3,893 9.7% 12,058 13,648 13.2%
Interest expense 1,180 1,272 7.8% 4,560 5,099 11.8%
Net Interest Income 2,368 2,621 10.7% 7,498 8,549 14.0%
Net interest margin 6.7% 6.9%
Other Income 65 83 27.7% 210 198 -5.7%
Other Expense 670 642 -4.2% 2,525 2,667 5.6%
Provisions and contingencies 599 458 -23.5% 2,463 2,824 14.7%
Profit before tax 1,164 1,604 37.8% 2,720 3,256 19.7%
Tax 409 524 28.1% 950 1,111 16.9%
Profit after tax/ (loss) 755 1,080 43.0% 1,770 2,145 21.2%
Net profit margin (%) 21.3% 27.7% 14.7% 15.7%
No. of shares (m) 95.2 95.2
Book value per share (Rs)* 154.2
Price to book value (x)* 1.4
* Book value as on 31st March 2009

What has driven performance in 4QFY09?
  • The economic slowdown prevalent in the last twelve months had an impact on the sales of commercial vehicles and tractors. Also, the excess inventory pile up in the automobile sector added up to poor demand for loans from NBFCs like Mahindra Finance. Mahindra Finance, which is predominantly a financer of tractors and utility vehicles sold by M&M, saw the proportion of disbursements towards utility vehicles increase from 34% in March 2008 to 40% in March 2009. This was primarily due to the new launches in this segment. The proportion of disbursements towards tractors (22%) and commercial vehicles (6%) dropped while that towards cars increased marginally from 23% to 25% during the period.

    The growth in advances of 3% YoY for the fiscal is 3% lower than our estimates. The growth in net interest income is, however, nearly 50% higher than our estimates due to the company’s ability to borrow funds at lower costs and sustain higher net interest margins. We had estimated NIMs at 6.7% for FY09 and see the same improving by approximately 0.5% this fiscal.

    Marginal growth...
    (Rs m) FY08 % of total FY09 % of total Change
    Advances 66,475 68,706 3.4%
    Borrowings 50,734 52,203 2.9%
    Secured 46,135 90.9% 44,819 85.9% -2.9%
    Unsecured 4,599 9.1% 7,384 14.1% 60.6%
    Credit borrowing ratio 131.0% 131.6%

  • 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
    (%) FY07 FY08 FY09
    Auto / utility vehicles 36 34 40
    Tractors 23 24 22
    Cars 22 23 25
    Commercial vehicles 4 7 6
    Refinance 15 12 7

  • Mahindra Finance’s other income base failed to grow in 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, failed to contribute due to lower disposable income in rural households as a result of the high interest and inflation levels.

  • The rise in interest rates had led to higher delinquencies for the NBFC in the past few quarters. The NPAs at the gross level moved up from 7.6% in FY08 to 8.7% in FY09. However, due to higher provisioning and lower asset growth, the net NPA were lower at 2.6% at the end of FY09 as compared to 2.9% of advances at the end of FY08. The provision coverage ratio was 72% at the end of FY09. Also, notwithstanding the shift from tractors to cars and utility vehicles, we believe that the company's asset quality will continue to be subject to slippages as long as the economic slump persists.

What to expect?
At the current price of Rs 211, the stock is trading at a multiple of 1.5 times our estimated FY11 adjusted book value. While we had revised our estimates for the company taking into consideration the weak outlook for the automobile sector, we will have to factor in the company’s better than estimated performance in FY09. 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&M’s portfolio will be the key to the company’s growth in the longer term.

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