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Mah Fin.: Asset quality issues surface
Jul 29, 2013

Mahindra Finance declared its results for the first quarter of the financial year 2013-14 (FY14). The company reported a 32% growth in income from operations while net profits have grown by 18% YoY during 1QFY14. Here is our analysis of the results.

Performance summary
  • Income from operations grows by 32% YoY in 1QFY4.
  • Loan book grows by whopping 39% YoY in 1QFY14. Value of Assets financed grows by 32% YoY.
  • Net NPA to total advances went up to 1.9% at the end of 1QFY14 (1.2% in 1QFY13).
  • Net interest margins decrease to 7.2% in 1QFY14 from 7.3% in 1QFY13 on account of higher interest costs.
  • Bottomline grows by 18% YoY during 1QFY14.
  • Cost to income ratio drops marginally to 33.2% in 1QFY14 from 33.9% in 1QFY13.

Consolidated performance snapshot
Rs (m) 1QFY13 1QFY14 Change
Income from operations 8,826 11,647 32.0%
Interest expense 3,587 4,948 37.9%
Net Interest Income 5,239 6,699 27.9%
Net interest margin 7.3% 7.2%  
Other Income 30 60 96.7%
Other Expense 1,837 2,352 28.1%
Provisions and contingencies 873 1,302 49.1%
Profit before tax 2,559 3,106 21.3%
Exceptional gains / losses      
Tax 837 1,060 26.7%
Profit after tax/ (loss) 1,723 2,046 18.7%
Minority interest  3 15 385.8%
Net Profit to equity shareholders 1,720 2,031 18.1%
Net profit margin (%) 19.5% 17.4%  
No. of shares (m)   563.0  
Book value per share (Rs)*   81.7  
Price to book value (x)*    2.4  
* Book value as on 30th June 2013
Exceptional gains pertain to gain from part sale of stake in insurance subsidiary

What has driven performance in 1QFY14?
  • The Indian automobile industry grew by mere 1.2% in FY13. The industry witnessed a decline of 8.7% YoY in vehicle production during March 2013 . The overall growth in domestic sales in FY13 was 2.61%. Passenger Vehicles (PV) segment grew at 2.15% in FY13. The Passenger Car segment declined by 6.69%, while the Utility Vehicles segment grew by 52.2% during FY13, as compared to the same period last year. The overall Commercial Vehicles (CV) segment registered a de-growth of 2.02% in FY13, compared to the same period last year. While Medium and Heavy Commercial Vehicles (MHCVs) segment growth declined by 23.18%, Light Commercial Vehicles grew at 14.04%. The Indian tractor market declined marginally, 1.7% lower than the previous year as against a high growth of 32%, 20% and 11%, respectively, in the previous three fiscals.

  • Notwithstanding the challenges, the assets under management registered a growth of 36% YoY and the total assets financed by the company grew by strong 32% YoY during 1QFY14 primarily due to:
    1. The company's strategy of increasing penetration levels in rural markets for the business growth expansion. The company opened 18 new branches during the first quarter of the fiscal.
    2. The tractor sales gained strength during 1QFY14. Out of the total assets financed, the highest contribution came from auto and utility vehicles, followed by cars and tractors. The second vehicle financing picked up well during the quarter.
    3. While the heavy commercial vehicle segment underperformed, the company strategically curtailed lending to this segment
    4. The southern market, that was slow and had reported subdued growth in the previous financial year, has delivered satisfactory performance this year.

    The above factors put together and the 16% average annual growth rate expected in addressable market by 2017-18 continues to provide ample opportunity for Mahindra Finance to grow.

    Dynamic growth...
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Assets under management 217,441   295,394   35.9%
    Advances 108,150   153,369   41.8%
    Borrowings 122,312   174,805   42.9%
    Secured 94,203 77.0% 146,432 83.8% 55.4%
    Unsecured 28,109 23.0% 28,373 16.2% 0.9%
    Credit borrowing ratio 88.4%   87.7%    

  • Mahindra Finance, which was once predominantly a financer of tractors and utility vehicles sold by M&M, now has been witnessing traction in non M&M vehicles, thus de-risking its portfolio to some extent. The company has also seen increased traction from its used vehicle and tractor portfolio.

    AUM mix
    (%) 1QFY13 1QFY14
    Auto / utility vehicles (M&M) 28 28
    Tractors (M&M) 20 19
    Cars/Others** 32 33
    CVs and construction equip. 13 12
    Used vehicles & others 7 8

  • The margins for the quarter declined largely due to compression in yields. Change in product mix was primarily responsible for yields moving down. The margins were reported at 7.3% for the quarter. The company expects the current quarter also to witness margin pressures primarily on the back of increasing borrowing costs. That said, going ahead the yields would not oscillate much since the company has already done away with low-yielding assets.

  • The provisions, which were up almost 50% YoY, proved to be the major deterrent to profits during 1QFY14. That said, the situation does not stand alarming in terms of asset quality for Mahindra Finance. Gross NPAs moved up to 4.2% during 1QFY14. Net NPA to total advances went up to 1.9% at the end of 1QFY14 (1.2% in 1QFY13). The spike is largely attributed to the slowdown in southern market and the blow from the commercial vehicle segment. That said, the company expects the NPAs to remain range-bound at 3.9%-4.6%. The company's conservative risk management practices are expected to contain asset quality deterioration.

  • The funding mix for Mahindra Finance stands tilted towards bank funding with almost 50% coming from banks followed by mutual funds. The company's credit rating and the strong brand equity is expected to enable it to borrow funds at competitive rates.

  • The bottom-line grew by 18% YoY during 1QFY14. The performance of subsidiaries was satisfactory.

What to expect?

At the current price of Rs 241, 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. However, change in product mix did result in NIMs compression. That said, going ahead the margins would stabilize at 7% levels. The overheads remain under control.

Mahindra finance continues to bank on its rich rural-India presence. The UVs, tractors, cars and second vehicles financing would remain the focus area for business growth going forward. As the harvest season unfolds, the satisfactory monsoons will aid in better performance in 2HFY14.

However, the company is bound to be vulnerable to the continued economic slowdown and geography specific issues. Moreover, the CAGR earnings from the FY16 perspective do not look attractive. Hence, we recommend that investors should not buy the stock at current levels.

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