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Mahindra Finance: Steep delinquencies - Views on News from Equitymaster
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Mahindra Finance: Steep delinquencies
Jul 24, 2008

Performance summary
  • Interest income grows by 20% YoY in 1QFY09 on the back of a tepid 9% YoY growth in advances.
  • Net interest margin improves to 10.5% in 1QFY09 (9.5% in 1QFY08) due to increased spreads on tractor loans.

  • Delinquency rates rise with higher dependence on tractor loans.

  • Cost to income ratio reduces to 16.4% from 24.2% in 1QFY08.

  • Bottomline grows by 32.8% YoY aided by operating efficiency and better interest margins.

Rs (m) 1QFY08 1QFY09 Change
Interest income 2,446 2,946 20.4%
Interest expense 1,032 1,103 6.9%
Net Interest Income 1,414 1,843 30.3%
Net interest margin (%) 9.5% 10.5%  
Other Income 50 48 -4.0%
Other Expense 355 311 -12.4%
Provisions and contingencies 586 878 49.8%
Profit before tax 1,109 1,580 42.5%
Tax 108 151 39.8%
Profit after tax/ (loss) 415 551 32.8%
Net profit margin (%) 17.0% 18.7%  
No. of shares (m) 84.0 95.4  
Book value per share (Rs)   140.5  
P/BV (x)*   1.8  
*Book value as on 30th June 2008

What has driven performance in 1QFY09?
  • With the economic slowdown being inevitable and the outlook for the auto-manufacturing sector being muted, auto financers are not having their growth prospects very stable in the medium term. Mahindra Finance consciously adopted a cautious stance in the previous quarter with regard to margins and asset quality and grew its advance base by merely 9% YoY in 1QFY09. Having said that, due to the priority sector status accorded to rural / farm lending, most of the growth came from the tractor loans segment that comprised nearly 33% of the company’s advance book (25% in FY08).

    Mahindra Finance is able to garner approximately 3% discount on its borrowing cost for tractor lending and 1% discount for funding utility vehicles. Typical to their nature, the tractor loans yielded the company superior spreads (in the range of 12% to 13%) but at the same time posed some delinquency problems. This led to the met interest margins improve by nearly 1% to 10.5% in 1QFY09.

    Slowdown imminent...
    (Rs m) 1QFY08 % of total 1QFY09 % of total Change
    Advances 62,701   68,350   9.0%
    Borrowings 51,948   52,115   0.3%
    Secured 41,090 79.1% 39,333 75.5% -4.3%
    Unsecured 10,858 20.9% 12,782 24.5% 17.7%
    Credit borrowing ratio 120.7%   131.2%    

  • 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 has impacted the incremental demand for tractors and farm equipments in recent months as well as led to higher delinquencies. The NPAs at the gross as well as net levels moved up from 7.6% to 9.8% and 2.9% to 4.3% of advances respectively in the first quarter of FY09. Being the largest player financing this segment, Mahindra Finance's asset book remains susceptible to the vagaries of rainfall distribution in the arable areas. Also, notwithstanding the shift from tractors to cars and commercial vehicles, the company's asset quality will continue to be subject to slippages due to this reason.

What to expect?
At the current price of Rs 254, the stock is trading at 1.9 times our estimated FY10 adjusted book value. We may have to revise our estimates for the company taking into consideration the weak outlook for the automobile sector. Nonetheless, its niche presence in the high-yielding tractor and used vehicle financing business earns Mahindra Finance an edge over its peers in terms of net interest margins. Further the subsidy in borrowing costs for funding farm equipments provides substantial cushion in a rising interest rate scenario. Also, the NBFC's well-entrenched reach and opportunity of financing Punjab Tractors' vehicles offers some upsides in the longer term.

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Feb 19, 2018 01:51 PM


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