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KMFL: Competition hits growth

May 13, 2002

Kotak Mahindra Finance (KMFL) continued to report decline in income from operations in the fourth quarter. However, lower provisions and interest cost saved the day for the company with a 55% rise in earnings. Increasing competition from banks in personal finance business impacted the company's revenue growth during the year.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Income from Operations 488 451 -7.7% 1,813 1,703 -6.1%
Other Income 257 135 -47.6% 623 498 -20.0%
Interest & depreciation 260 242 -7.1% 1,096 923 -15.8%
Net interest income 228 209 -8.4% 717 780 8.7%
Other Expenses 121 114 -5.3% 432 394 -8.8%
Operating Profit 107 94 -11.9% 285 386 35.3%
Operating Profit Margin (%)21.9%20.9% 15.7%22.7% 
Provisions and Contingencies 55 -12-122.2% 77 13169.2%
Profit before Tax 309 241 -21.9% 831 753 -9.3%
Tax 180 42-76.9% 335 202-39.9%
Profit after Tax/(Loss) 129 200 55.2% 496 552 11.3%
Net Profit Margin (%)26.3%44.3% 27.4%32.4% 
No. of Shares (m) 59.2 59.2   59.2 59.2  
Diluted Earnings per share*8.713.5 8.49.3 
P/E Ratio 12.0  17.4 
*(annualised)      

In FY02, KMFL's financing portfolio grew in excess of 50% over the previous year. Out of this, the commercial vehicle financing business was up 90% over the previous year with new disbursements crossing Rs 5 bn. The company's revenues are however, declining since the last two years. This could be due to the fact that interest rates have declined significantly and competition has increased substantially, which could have impacted revenue growth.

The company managed to improve operating margins by nearly 700 basis points to 23% on the back of stiff cost control measures and a 18% reduction in interest cost. Its cost to income ratio however, declined marginally to 31% from 32% in the previous year, as its other income declined sharply by 20%. In FY02, KMFL's dividend income from subsidiaries dropped by 78% to Rs 37 m. Its investments in group companies accounted for 28% of revenues and 45% of pre tax profits.

Following the Reserve Bank of India’s in-principle approval, the company has initiated the necessary steps towards conversion into a bank. It expects to draw significant synergies with its existing personal finance business in terms of lower cost of funds and more cross selling opportunities.

At the current market price of Rs 162, KMFL is trading on a P/E of 17x and price to book value ratio of 1.6x FY02 earnings. The stock has witnessed a sharp run-up in the last two months, rising from the level of about Rs 50 in December 2001. This was after the company had been given approval by the RBI to convert into a bank. KMFL's current valuations are in line with the second rung private banking stocks. Going forward, the company's ability to successfully leverage on the banking model would determine its valuations.

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