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Mahindra Finance.: FY15 hit by slow recovery - Views on News from Equitymaster

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Mahindra Finance.: FY15 hit by slow recovery
May 4, 2015

Mahindra Finance declared its results for the fourth quarter (4QFY15) and financial year FY15. The company reported a 17.2% YoY growth in net interest income while net profits increased by 9% YoY during 4QFY15. For FY15, the profits were down by 4.3% YoY. Here is our analysis of the results.

Performance summary
  • Income from operations grew by 13.6% YoY in 4QFY15. For FY15, income from operations increased by 14.1% YoY backed by 8% YoY growth in assets under management of standalone.
  • While the loan growth stood at 11%, the value of assets financed for standalone declined by 4% YoY during FY15.
  • Net interest margin of standalone fell slightly to 7.7% for FY15.
  • Cost to income ratio fell to 30% in 4QFY15 from 30.8% in 4QFY14.
  • Bottom-line increased by 9% YoY during 4QFY15 on a relatively slower rise in other expenses. But net profit was down by 4% YoY in FY15.
  • Net NPA to total advances of standalone went up to 2.4% at the end of FY15 (1.9% in FY14).

Consolidated financial performance snapshot
Rs (m) 4QFY14 4QFY15 Change FY14 FY15 Change
Income from operations 14,662 16,649 13.6% 52,752 60,211 14.1%
Interest expense 6,244 6,779 8.6% 22,810 26,430 15.9%
Net Interest Income 8,418 9,870 17.2% 29,943 33,782 12.8%
Net interest margin       7.8% 7.7%  
Other Income 98 152 54.3% 253 398 57.0%
Other Expense 2,621 3,005 14.7% 10,391 11,689 12.5%
Provisions and contingencies 775 1,505 94.2% 5,190 8,491 63.6%
Profit before tax 5,121 5,512 7.6% 14,615 13,999 -4.2%
Exceptional gains / losses            
Tax 1,721 1,793 4.2% 4,968 4,750 -4.4%
Profit after tax/ (loss) 3,400 3,719 9.4% 9,648 9,249 -4.1%
Minority interest 35 46 31.6% 104 120 15.6%
Net Profit to equity shareholders 3,365 3,673 9.1% 9,544 9,129 -4.3%
Net profit margin (%) 23.0% 22.1%   18.1% 15.2%  
No. of shares (m)         564  
Book value per share (Rs)*         105.3  
Price to book value (x)*         2.6  
* Book value as at the end of December 2014

What has driven performance in 4QFY15?
  • The company's profits have improved due to improvement in the collection efficiency ratio that rose to over 100% for quarter as compared to below 90% in the preceding quarter. But provisioning continued to remain high registering a rise of 94% for the quarter. The value of assets financed by the company on a standalone basis increased by 7% compared to a fall of 8% in 3QFY15.

    Dynamic growth...
    (Rs m) FY14 % of total FY15 % of total Change
    Assets under management* 341,331   368,780   8.0%
    Advances 321,105   376,182   17.2%
               
    Borrowings 197,641   221,238   11.9%
    Secured   0.0%   0.0%  
    Unsecured   0.0%   0.0%  
    Credit borrowing ratio 162.5%   170.0%    
    * Standalone

  • The company has been able to maintain Net interest margin (NIM) for FY15 backed by controlled funding costs. The company expects benefits from interest rate cut to flow from next financial year onwards. However the net spread for the company has contracted by 100 basis points to 3.8%.

  • Mahindra Finance's cost to income ratio fell to 32.5% in FY15 from 33% in FY14.

  • Asset quality continues to remain the major cause of worry for Mahindra Finance. The gross NPA to total assets (standalone) rose to 5.9% in FY15 from 4.4% in FY14. Even the net NPA to total assets (standalone) has risen to 2.4% in FY15 as compared to 1.9% in FY14. The company's coverage ratio has improved to 61% in FY15 from 59% in the previous year.

    AUM mix (Standalone)
    (%) FY14 FY15
    Auto / utility vehicles (M&M) 29 31
    Tractors (M&M) 19 18
    Cars/Others** 24 23
    CVs and construction equip. 15 13
    Used vehicles & others 14 15
    ** Others include non-M&M vehicles
    CVs stand for commercial vehicles
What to expect?
At the current price of Rs 270, the stock is trading at a multiple of 2.4 times our estimated FY16 adjusted book value.

Mahindra Finance has been adversely impacted by the economic slowdown that has led to delay in the payment cycle from customers. As 90% of the company's customers belong to the 'earn & pay' segment, the company wants to focus on recovery rather than getting business by compromising on profitability. The company's efforts have resulted in improvement in collection efficiency ratio in 4QFY15. Going ahead, the company wants to emphasize on affordable and semi-urban housing and derive synergies from a a group company present in the segment.

Although the stock of Mahindra Finance is attractively valued, the asset quality concerns warrant caution. We recommend existing shareholders to hold on to the stock. Mahindra Finance, however, holds the potential to benefit from the turnaround in the macro economy and the government's continued rural and semi-urban focus. Therefore, we would like to wait and watch the makeover of the balance sheet and would wait for the right opportunity before we recommend it to our subscribers. Kindly ensure that no stock forms more than 5% of your portfolio.

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