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Mahindra Fin.: FY15 starts with a weak quarter - Views on News from Equitymaster
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Mahindra Fin.: FY15 starts with a weak quarter
Sep 2, 2014

Mahindra Finance declared its results for the first quarter of the financial year 2014-15 (FY15). The company reported a 12.1% YoY growth in net interest income while net profits declined by 16.5% YoY during 1QFY15. Here is our analysis of the results.

Performance summary
  • Income from operations grows by 18.2% YoY in 1QFY15, backed by 16% YoY growth in assets under management.
  • While the loan growth remains stable, the value of assets financed declines by 13% YoY.
  • Net interest margins increase to 7.6% in 1QFY15 from 7.2% in 1QFY14 on account of stable interest income.
  • Cost to income ratio remains at 34.8% levels in 1QFY15.
  • Bottom-line declines by 16.5% YoY during 1QFY15.
  • Net NPA to total advances went up to 3.0% at the end of 1QFY15 (1.9% in 1QFY14).

Consolidated performance snapshot
Rs (m) 1QFY14 1QFY15 Change
Income from operations 11,647 13,768 18.2%
Interest expense 4,948 6,261 26.5%
Net Interest Income 6,699 7,507 12.1%
Net interest margin 7.2% 7.6%  
Other Income 60 76 27.2%
Other Expense 2,352 2,640 12.3%
Provisions and contingencies 1,302 2,325 78.7%
Profit before tax 3,106 2,617 -15.7%
Exceptional gains / losses
Tax 1,060 903 -14.8%
Profit after tax/ (loss) 2,046 1,714 -16.2%
Minority interest 15 19 27.7%
Net Profit 2,031 1,695 -16.5%
Net profit margin (%) 17.4% 12.3%  
No. of shares (m)   563.5  
Book value per share (Rs)*   92.2  
Price to book value (x)*   3.0  
* Book value as on 30th June 2014
Exceptional gains pertain to gain from part sale of stake in insurance subsidiary

What has driven performance in 1QFY15?
  • The decline in profitability for the company can be largely attributed to the weak revenue growth and higher provisions. While the loan growth has remained stable, the asset quality for the quarter has deteriorated. Deficient monsoons and fall in private consumption demand have impacted the business growth of the company.

  • Notwithstanding the challenges, the assets under management registered a growth of 16% YoY, thanks to the healthy growth in utility vehicles and used-vehicles segments. But the total assets financed by the company have declined by 13% YoY primarily due to 40% YoY decline in CV segment.

  • The margins for the company has gone up YoY, however, the spreads for the quarter have narrowed down. Moreover, the company has changed the borrowing mix with higher exposure towards banks. The company's credit rating and the strong brand equity is expected to enable it to borrow funds at competitive rates. The securitization income has decreased too during 1QFY15. With large proportion of high yielding assets, Mahindra Finance is expected to maintain margins going forward.

  • The provisions that stood at staggering 78.7% YoY during the quarter proved as a major deterrent to the earnings performance of the company. This coupled with higher stock of bad loans added to the woes of Mahindra Finance. The gross NPAs have gone up from 4.2% in 1QFY14 to higher levels of 6.2% during 1QFY15. Net NPAs at 3% levels also indicate that the company stands quite vulnerable. Stress in the CV and the car segments have been largely responsible for the deteriorating credit quality of Mahindra Finance.
What to expect?
At the current price of Rs 274, the stock is trading at a multiple of 2.4 times our estimated FY16 adjusted book value.

Subdued economic activity, sluggish auto market and business cyclicality have been the major dampeners to the earnings growth of Mahindra Finance. 1QFY15 marked sharp deterioration in asset quality for Mahindra Finance with company reporting highest NPAs in the vehicle financing industry. This coupled with higher provisions continue to depress the earnings for the company. While the asset quality pressures are here to stay, the loan book consolidation would also continue to cast a shadow on the earnings performance of the company in the near term.

While the medium-term pressures remain, we recommend investors to not buy more of the stock at current levels. We also recommend the ones holding the stock to remain cautious about the asset quality of the company. Mahindra Finance, nonetheless, is rightly positioned from the turnaround in the macro economy and the government's continued rural and semi-urban focus. Kindly ensure that no stock forms more than 5% of your portfolio.

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