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Mah Fin.: No signs of slowdown - Views on News from Equitymaster
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Mah Fin.: No signs of slowdown
May 20, 2013

Mahindra Finance declared its results for the fourth quarter and financial year 2012-13 (FY13). The company reported a 42% growth in income from operations while net profits have grown by 44% YoY during FY13. Here is our analysis of the results.

Performance summary
  • Income from operations grows by 42% YoY in FY13, and 34% YoY in 4QFY13.
  • Advances grow by 47% YoY in FY13. Assets under management grow by 35% YoY.
  • Net NPA to total advances remain at 1.0% at the end of FY13 (0.7% in FY12).
  • Net interest margins increase to 7.4% in FY13 from 7.0% in FY12 despite higher interest costs.
  • Bottomline grows by 44% YoY during FY13 and 43% during the 4QFY13.
  • Cost to income ratio drops to 32.6% in FY13 from 35.4% in FY12.


Consolidated performance snapshot
Rs (m) 4QFY12 4QFY13 Change FY12 FY13 Change
Income from operations 8,851 11,851 33.9% 28,894 40,949 41.7%
Interest expense 3,391 4,639 36.8% 11,398 16,705 46.6%
Net Interest Income 5,460 7,212 32.1% 17,496 24,244 38.6%
Net interest margin       7.0% 7.4%  
Other Income 67 41 -38.8% 209 180 -13.9%
Other Expense 1,753 2,374 35.4% 6,492 8,321 28.2%
Provisions and contingencies 138 329 138.4% 1,599 2,881 80.2%
Profit before tax 3,636 4,550 25.1% 9,614 13,222 37.5%
Exceptional gains / losses   305   - 305  
Tax 1,210 1,387 14.6% 3,167 4,237 33.8%
Profit after tax/ (loss) 2,426 3,468 43.0% 6,447 9,290 44.1%
Minority interest  2 4 133.3% 2 1 -50.0%
Net Profit to equity shareholders 2,424 3,464 42.9% 6,445 9,289 44.1%
Net profit margin (%) 27.4% 29.2%   22.3% 22.7%  
No. of shares (m)         563.0  
Book value per share (Rs)*         78.3  
Price to book value (x)*         3.1  
* Book value as on 31st March 2013
Exceptional gains pertain to gain from part sale of stake in insurance subsidiary

What has driven performance in FY13?
  • The India auto sector had a very dry spell in FY13. Passenger vehicle volumes in particular were badly affected. The Society of Indian Automobile Manufacturers (SIAM) expects passenger vehicles to grow by 12-14% per annum over the next 5 years. While the addressable market for passenger vehicles is expected to double from 67 m households in FY13 to 139 m households in FY18, the growth will not be without hiccups. For Mahindra Finance, which caters primarily to the semi-urban and rural markets, being able to leverage on its vast network of 657 offices is a big advantage.

  • The company's customer contracts grew by 14% YoY to 533 m at the end of FY13. Despite higher lending rates, Mahindra Finance still managed to grow its advances by 47% in FY13. The company added 50 branches in FY13 and still has a lot of room to grow within the rural market. Most car manufacturers are looking at rural India to offset slowing growth in urban areas, and Mahindra Finance is thus a key beneficiary of this shift. Besides Mahindra vehicles and Maruti cars, the company is also seeing increased demand from other manufacturers like Hyundai and Toyota.

    Dynamic growth...
    (Rs m) FY12 % of total FY13 % of total Change
    Assets under management 206,429   279,131   35.2%
    Advances 96,384   141,662   47.0%
               
    Borrowings 113,500   153,973   35.7%
    Secured 99,110 87.3% 138,154 89.7% 39.4%
    Unsecured 14,390 12.7% 15,819 10.3% 9.9%
    Credit borrowing ratio 84.9%   92.0%    

  • Mahindra Finance, which was once predominantly a financer of tractors and utility vehicles sold by M&M, now has an almost 47:53 mix of M&M and non M&M vehicles, thus de-risking its portfolio to some extent. The company has also seen increased traction from its used vehicle and construction equipment portfolio.

    AUM mix
    (%) FY12 FY13
    Auto / utility vehicles (M&M) 30 32
    Tractors (M&M) 20 19
    Cars/Others** 31 27
    CVs and construction equip. 12 15
    Used vehicles & others 7 7
    ** Others include non-M&M vehicles
    CVs stand for commercial vehicles

  • NPAs (non-performing assets) at the gross level remained stable at 3% of advances (as was the case in FY12). However, despite higher provisioning, the net NPAs remained at 1.0% at the end of FY13 (0.7% in FY12). The provision coverage ratio was 65.9% in FY13 (78% in FY12). While Mahindra Finance has claimed that the new loan recovery system implemented by it in a number of states will yield good results in sustaining asset quality, we will have to see if the company maintains its asset quality even in the tough economic environment.

  • Mahindra Finance's capital adequacy stood at 19.7% at the end of FY13. This leave enough headroom for the company to grow its loan book.

What to expect?
At the current price of Rs 242, the stock is trading at a multiple of 2.4 times our estimated FY15 adjusted book value (post adjustment of stock split). The company has seen robust growth, despite a tough environment and high interest rates. While its rural customers were not as affected by the rate hikes, Mahindra Finance saw a huge spike in its cost of funds. Margins did not contract however as lending yields were also higher, however spreads saw some impact. The company has also maintained asset quality and has continued to improve its operating efficiency.

However, as the rural economy also likely to get impacted with a prolonged downturn in the economy, we expect loan growth to moderate in FY14. We will soon review our estimates for the stock and update it with FY16 projections. Until then, we recommend that investors who have the stock in their portfolio hold on to it.

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