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Mah Fin.: Buoyant growth amidst tough times

Aug 1, 2011

Mahindra Finance declared its (1QFY12). The company has reported a 42% growth in interest income while net profits have grown by 21% YoY. Here is our analysis of the results.

What has driven performance in 1QFY12?
  • Interest income grows by 42% YoY 1QFY12 on the back of 47% YoY growth in advances. Assets under management grew by 40% YoY.
  • Value of assets financed grew 34% YoY over the past 12 months.
  • Net interest margins increased from 5.5% in 1QFY11 to 6.2% in 1QFY12.
  • Bottomline grows by 32% YoY during 1QFY12; largely on the back of growth in interest income and lower provisioning.
  • Other income grows 51% during the quarter.
  • Capital adequacy ratio was a healthy at 18.7% at the end of 1QFY12.

Rs (m) 1QFY11 1QFY12 Change
Interest income 4,045 5,722 41.5%
Interest expense 1,328 2,185 64.5%
Net Interest Income 2,716 3,537 30.2%
Net interest margin 5.5% 6.2%  
Other Income 82 123 50.5%
Other Expense 1,026 1,483 44.6%
Provisions and contingencies 576 615 6.8%
Profit before tax 1,196 1,562 30.6%
Tax 397 505 27.3%
Minority interest 1 2 53.1%
Profit after tax/ (loss) 797 1,055 32.3%
Net profit margin (%) 19.7% 18.4%  
No. of shares (m) 96.9 104.0  
Book value per share (Rs)*   252.7  
Price to book value (x)*   2.7  
* Book value as on 30th June 2011

What has driven performance in 1QFY12?
  • The 27% YoY growth in new customer contracts of Mahindra Finance is testimony to the fact that the institution has been able to reap benefits of higher income in the rural hinterland. This is despite the rising interest rate environment. Most of Mahindra Finance’s customers have not been hurt as much by rising interest rates, as their cash flows have increased due to the NREGA (National Rural Employment Guarantee Act) scheme, good monsoons, as well as additional employment through various projects being executed across the country. The rural market for vehicles continues to be more buoyant that the urban 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.

  • The company saw a 47% YoY growth in advances during 1QFY12. This growth in advances was higher than what we expected. Plus, with the good monsoon, the company expects to clock in a good growth in advances for the year. The company usually sees better growth in the later part of the year due to the festival season. The rural market runs mainly on sentiments, thus if the monsoon is good, and crop yields increase, there is more demand for vehicles.

    Healthy growth...
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Advances 97,297   143,084   47.1%
    Borrowings 69,885   105,757   51.3%
    Secured 54,524 78.0% 89,370 84.5% 63.9%
    Unsecured 15,361 22.0% 16,387 15.5% 6.7%
    Credit borrowing ratio 139.2%   135.3%    

  • Mahindra Finance, which is predominantly a financer of tractors and utility vehicles sold by M&M, saw most of its incremental disbursements go to cars, commercial vehicles and construction equipment. The company saw the proportion of disbursements towards utility vehicles drop from 34% in June 2010 to 27% in June 2011. The proportion of disbursements towards cars (32%) and commercial vehicles (10%) increased while that towards tractors stayed at 22% during the period.

    Disbursement mix
    (%) 1QFY11 1QFY12
    Auto / utility vehicles 34 27
    Tractors 22 22
    Cars and others   29 32
    CVs and construction equip. 7 10
    Used vehicles & others 8 9

  • The company saw an increase in profitability, with net profits increasing by 32% YoY in 1QFY12. 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. Thus, no profits will be booked on the same going forward. However, as per regulatory clarifications, the company may once again start recording income from such operations.

  • The company has kept a keen eye on its asset quality. NPAs (non-performing assets) at the gross level moved lower from 6.9% in 1QFY11 to 4.6% in 1QFY12. Also, due to higher provisioning, the net NPA were lower at 1% at the end of 1QFY12 as compared to 1.3% of total assets at the end of 1QFY11. The provision coverage ratio was maintained at 79.7% at the end of 1QFY12. The company has invested in a legal system in a number of states, which has helped it boost recovery and cut down NPAs tremendously.

What to expect?
At the current price of Rs 673, the stock is trading at a multiple of 1.8 times our estimated FY14 adjusted book value. The company has seen strong growth, despite a tough environment. It is strongly benefiting from increased rural incomes, and is set to benefit from the good monsoons currently. It is targeting to achieving its 30% disbursement growth target for the year. Car manufacturers are increasingly looking at rural India to fuel their growth stories. Urban centers have been reporting a loss in volumes, while semi-urban and rural segments, which are Mahindra Finance’s key markets, are seeing growth. Control over asset quality and extending its advance base beyond parent M&M’s portfolio will be the key to the company’s growth in the longer term. The company has also successfully passed on some of the rate hike impact to its borrowers, in order to offset higher costs of funds. We had earlier recommended a HOLD on the company in our quarterly review. We will soon revisit our estimates on the stock in light of the better than expected performance from the company.

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