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KMFL's dismal performance in 1Q

Aug 14, 2001

Kotak Mahindra Finance Limited (KMFL) reported dismal performance in the June quarter. The company's earnings dropped by 9% on the back of a 157% jump in provisions for non-performing assets (NPAs). Topline growth of KMFL was a marginal 7%. Nevertheless, it was better than a 22% fall in FY01 revenues.

(Rs m) 1QFY01 1QFY02 Change
Income from operations 435 466 7.0%
Other income 141 118 -16.4%
Financial expenses 277 238 -14.1%
Operating Profit (EBDIT) 158 228 43.9%
Operating Profit Margin (%) 36.3% 48.9%  
Operating expenses 87 98 12.4%
Profit before tax 212 247 16.7%
Provision & write off 17 43 156.6%
Tax 45 68 50.0%
Profit after Tax/(Loss) 150 137 -8.7%
Net profit margin (%) 34.6% 29.5%  
No. of Shares (eoy) (m) 45.9 59.2  
Diluted Earnings per share 10.2 9.3  
P/E (at current price)   5  

The company's business is facing strong competition from banks and financial institutions which have entered into car finance and personal finance business since the past two years. These entities are leveraging on their large size and network to diversify into lucrative consumer finance business. KMFL's other income witnessed a fall of 16%. Due to tough market conditions, the company's subsidiaries in capital market and in auto finance seem to have taken a hit and consequently, their contribution to the other income has declined.

KMFL's operating margins improved sharply due to 23% reduction in interest cost. This has fueled the operating profit growth by 44%. However, a 30% jump in staff cost trimmed the profit growth of the company. KMFL's foray into insurance business could have led to a sharp rise in employee cost. However, the company's cost to income ratio declined marginally to 28% from 29% in 1QFY01.

Net profit growth was hit due to a 157% rise in provision amount for NPAs. Adverse industry scenario and downturn in capital markets could have led to investment loss for the company. The company's provisioning amount for FY01 was lower by 44%. The net NPAs as a percentage of networth stood at 1.4% as on March '01.

At the current market price of Rs 43, KMFL is trading at P/E of 5x and Price/Book value ratio of just 0.5x on 1QFY02 annualised earnings. In the past, the company's Price/Book value ratio was in the range of 1-3 times. The non-banking finance sector is facing a loss of confidence post the Tata Finance fiasco. Investor perception towards NBFCs has been affected as a result of this. Also subdued performance of the companies, is likely to keep valuations on the lower side.

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