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Mah Fin.: Robust profit growth - Views on News from Equitymaster

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Mah Fin.: Robust profit growth

Jul 31, 2012

Mahindra Finance (MMFS) for the first quarter of financial year 2012-2013 (1QFY13). The company has reported a 47% growth in net interest income while net profits have grown by 63% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 47% YoY 1QFY13 on the back of 41% YoY growth in advances. Assets under management grew by 38% YoY.
  • Value of assets financed grew 26% YoY over the past 12 months.
  • Net interest margins increased from 6.2% in 1QFY12 to 7.3% in 1QFY13.
  • Bottomline grows by 63% YoY during 1QFY13; largely on the back of growth in net interest income and despite higher provisioning.
  • Other income falls 44% during the quarter.
  • Capital adequacy ratio was a healthy at 17.4% at the end of 1QFY13 compared to a regulatory requirement of 15%.

Consolidated performance snapshot
Rs (m) 1QFY12 1QFY13 Change
Income from operations 5,749 8,827 53.5%
Interest expense 2,185 3,587 64.2%
Net Interest Income 3,564 5,240 47.0%
Net interest margin 6.2% 7.3%  
Other Income 59 33 -43.8%
Other Expense 1,445 1,786 23.6%
Provisions and contingencies 615 928 50.8%
Profit before tax 1,562 2,559 63.8%
Tax 507 837 65.1%
Minority interest 2 3 46.1%
Profit after tax/ (loss) 1,053 1,720 63.3%
Net profit margin (%) 18.3% 19.5%  
No. of shares (m)   104.0  
Book value per share (Rs)*   302.3  
Price to book value (x)*   2.3  
* Book value as on 30th June 2012

What has driven performance in 1QFY13?
  • The auto sector did not have a great run in FY12, post two years of robust growth. Even in FY13, Society of Indian Automobile Manufacturers (SIAM) expects muted growth. Mahindra Finance's growth that caters primarily to the semi-urban and rural markets, was a different story altogether. The company saw a robust 47% YoY growth in new customer contracts. This is a testament to the fact that the institution has been able to reap benefits of higher cash flows in rural India. Plus, the company has increased its branch network in order to increase penetration into these areas. Despite increasing lending rates, the lender still managed to grow its advances by 41% in 1QFY13. Growth continues to be robust on account of its diversified product mix, higher penetration into rural areas and is also higher in value terms as most manufactures have hiked vehicle prices. The company expects to maintain a 25-30% growth in disbursements and doesn't expect this to be too much of a challenge even in the current environment. The company usually sees better growth in the later part of the year due to the festival season and harvest period. However, it has also managed strong growth so far as well.

  • 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, Ford, Nissan and Toyota. Despite the problems with Maruti, which currently accounts for 65% of the vehicle volumes for MMFS, the financier still expects decent growth as Maruti plans to increasingly focus on rural areas. Plus dealers have stocks for around 40-45 days currently, and the labour problems at the factory should not exceed this timeframe.

    Healthy growth...
    (Rs m) 1QFY12 % of total 1QFY13 % of total Change
    Advances 143,091   201,717   41.0%
    Borrowings 105,757   157,919   49.3%
    Secured 89,370 84.5% 120,878 76.5% 35.3%
    Unsecured 16,387 15.5% 37,041 23.5% 126.0%
    Credit borrowing ratio 135.3%   127.7%    

  • Mahindra Finance has rejigged some of its disbursement classifications, thus it may not be fully comparable with last year's performance. However since it has a diversified portfolio and a vast geographic spread it has seen better growth than average. The south market is not doing very well currently; however this has been more than made up in other regions in the north. Even in commercial vehicles, although there is an overall slowdown, some range of vehicles is doing better than others.

  • The company's disbursements towards utility vehicles came comprised 31% in June 2012. The proportion of disbursements towards cars was 27%, commercial vehicles (CVs) 11% while that towards tractors came in at 19% during the period. Used vehicle financing also increased to 12%.

    Disbursement mix
    (%) 1QFY12 1QFY13
    Auto / utility vehicles 30 31
    Tractors 22 19
    Cars and others 28 27
    CVs and construction equip. 12 11
    Used vehicles & others 8 12

  • The company saw an increase in profitability, with consolidated net profits increasing by 63% YoY in 1QFY13. This was despite the company not undertaking any securitization in the quarter. The company's management has stated, that there will be no upfront income recorded from securitization, and it will mainly use it as a source of liquidity. Only 10% of its asset book will be securitized on a conservative basis, despite regulatory clarifications in its favour.

  • The company has kept a keen eye on its asset quality. NPAs (non-performing assets) at the gross level moved lower from 4.6% in 1QFY12 to 3.8% in 1QFY13. The net NPAs were slightly higher 1.2% at the end of 1QFY13 as compared to 1% of total assets at the end of 1QFY12. The provision coverage ratio was maintained at high levels of 70.2% at the end of 1QFY13. The company has on a prudential basis provided for personal loans and two-wheeler loans which were 60 days outstanding as it believes that in case the economy weakens further, unsecured loans will be the first to get hit.

  • Its capital adequacy stands at 17.4% currently with a Tier 1 capital base of over 14.7%.

What to expect?
At the current price of Rs 686, the stock is trading at a multiple of 1.6 times our estimated FY15 adjusted book value. Mahindra Finance has seen robust growth, despite a tough environment and high interest rates and the management continues to be bullish on the space. Rural customers were not as affected by the rate hikes, as the financier is able to adjust the EMIs according to its customers' cash flows. Plus, the company has been able to maintain conservative LTV ratios of 70-75%. Margins, did not contract as lending yields were also higher. However NIMs may contract going forward as the yields on commercial vehicles and cars are not as high as UVs and tractors.

The company has also maintained superior asset quality and continues to improve its operating efficiency. Mahindra Finance has also started being more conservative on securitization, despite RBI new guidelines on the same. Plus, it has stopped up-fronting income on securitization income, and only the spread is booked as income, which is amortized over the period of the loan. With the economy set for a slowdown, deficient monsoons and the RBI revising its projections for GDP growth downwards to 7%, rural cash flows may get affected. Thus, going forward we expect loan growth to moderate somewhat. We maintain our Hold view on the stock from a 2-3 year perspective.

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