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Mahindra Fin.: Profits hit by higher provisions - Views on News from Equitymaster
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Mahindra Fin.: Profits hit by higher provisions
Aug 11, 2015

Mahindra Finance declared its results for the first quarter (1QFY16) and financial year FY15. The company reported a 8.2% YoY growth in net interest income while net profits fell by 36.6% YoY during 1QFY16.

Performance summary
  • Income from operations grew by 9.3% YoY in 1QFY16 backed by 9.6% YoY growth in assets under management of standalone.
  • Net interest margin (NIM) of standalone business contracted from 7.6% in 1QFY15 to 7.4% in 1QFY16.
  • Cost to income ratio jumped up to 38% in 1QFY16 from 34.8% in 1QFY15.
  • Provisions & contingencies rose by a steep 45% during the quarter.
  • Bottom-line fell by 36.6% on the back of a slower rise in net interest income even as other expenses and provisions have grown at much faster pace.
  • Net NPA to total advances of standalone went up to 3.6% at the end of 1QFY16 as compared to 3% in 1QFY15.

Consolidated Financial Performance Snapshot
Rs (m) 1QFY15 1QFY16 Change
Income from operations 13,768 15,047 9.3%
Interest expense 6,261 6,928 10.6%
Net Interest Income 7,507 8,119 8.2%
Net interest margin      
Other Income 76 80 5.2%
Other Expense 2,640 3,126 18.4%
Provisions and contingencies 2,325 3,375 45.1%
Profit before tax 2,617 1,698 -35.1%
Exceptional gains / losses      
Tax 903 601 -33.4%
Profit after tax/ (loss) 1,714 1,097 -36.0%
Minority interest  19 23 19.4%
Net Profit to equity shareholders 1,695 1,074 -36.6%
Net profit margin (%) 12.3% 7.1%  
No. of shares (m)   564  
Book value per share (Rs)*   107.4  
Price to book value (x)*   2.4  
* Book value as at the end of June 2015

What has driven performance in 1QFY16?
  • Mahindra Finance's net interest income has grown at a tepid rate due to reduction in the gross spreads. The gross spread on a standalone basis reduced to 8.4% in 1QFY16 from 8.7% in the year-ago quarter. This in turn has resulted in slight reduction in NIM during the quarter.

    AUM mix (Standalone)
    (Rs m) 1QFY15 % of total 1QFY16 % of total Change
    Assets under management* 342,707   375,544   9.6%
    Advances 332,695   383,513   15.3%
               
    Borrowings 201,819   239,476   18.7%
    Credit borrowing ratio 164.8%   160.1%    

  • The NBFC's cost to income ratio rose by 3.3% to 38.1% in 1QFY16. Even the provisioning has increased due to deteriorating asset quality. The provisions & contingencies rose by 45% during the quarter. Consequently, the net profit declined by 36.6% during the quarter.

  • Asset quality issues continued to biggest point of worry for Mahindra Finance. The gross NPA to total assets (standalone) rose to 8% in 1QFY16 from 6.2% in 1QFY15. Even the net NPA to total assets (standalone) has risen to 3.6% in 1QFY16 as compared to 3% in 1QFY15. The company's coverage ratio has improved to 56.6% in 1QFY16 from 54% in the year-ago quarter.

    AUM mix (Standalone)
    (%) 1QFY15 1QFY16
    Auto / utility vehicles (M&M) 30 31
    Tractors (M&M) 19 18
    Cars 23 23
    CVs and construction equip. 14 13
    Used vehicles & others 14 15
    CVs stand for commercial vehicles
What to expect?
At the current price of Rs 262, the stock is trading at a multiple of 1.9 times our estimated FY17 adjusted book value.

Mahindra Finance has been hit by the economic slowdown that has led to delay in the payment cycle from customers. As 90% of the company's customers belong to the 'earn & pay' segment, the company wants to focus on recovery rather than getting business by compromising on profitability.

In the absence of clear signals to recovery, we recommend investors to not buy more at current levels. We also recommend that existing shareholders maintain sufficient margin of safety; given the weak credit quality of the company. Mahindra Finance, however, holds the potential to benefit from the turnaround in the macro economy and the government's continued rural and semi-urban focus. Therefore, we would like to wait and watch the makeover of the balance sheet and would wait for the right opportunity before we recommend it to our subscribers. Kindly ensure that no stock forms more than 5% of your portfolio.

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