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Mah Fin.: Asset quality under check
Oct 21, 2013

Mahindra Finance declared its results for the second quarter of the financial year 2013-14 (FY14). The company reported 30% YoY growth in net interest income while net profits have grown by 21% YoY during 2QFY14. The profit for 1HFY14 grew at 20% YoY. Here is our analysis of the results.

Performance summary
  • Income from operations grows by 33% YoY in 2QFY14 and the net interest income by 30% YoY
  • Loan book as at the end of 1HFY14 was recorded at Rs 280.9 bn. Value of Assets financed grows by 5% YoY during the quarter on standalone basis.
  • Net NPA to total advances remains flat at 1.9% at the end of 2QFY14 (1.5% in 2QFY13).
  • Net interest margins remain stable at 7.4% in 2QFY14, and the spreads for the quarter contract.
  • Bottomline grows by 21% YoY during 2QFY14.
  • Cost to income ratio drops marginally to 34% in 2QFY14 from 35% in 2QFY13.

Consolidated performance snapshot
Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Income from operations 9,696 12,858 32.6% 18,521 24,505 32.3%
Interest expense 4,015 5,477 36.4% 7,603 10,425 37.1%
Net Interest Income 5,680 7,380 29.9% 10,919 14,080 28.9%
Net interest margin       7.4% 7.4%  
Other Income 60 49 -18.8% 90 109 20.0%
Other Expense 1,990 2,555 28.4% 3,827 4,907 28.2%
Provisions and contingencies 853 1,286 50.7% 1,726 2,587 49.9%
Profit before tax 2,897 3,589 23.9% 5,456 6,694 22.7%
Exceptional gains / losses        -  -  
Tax 967 1,236 27.8% 1,804 2,296 27.3%
Profit after tax/ (loss) 1,930 2,353 21.9% 3,652 4,399 20.4%
Minority interest  5 28 505.5% 8 43 457.4%
Net Profit to equity shareholders 1,925 2,325 20.8% 3,645 4,355 19.5%
Net profit margin (%) 19.9% 18.1%   19.7% 17.8%  
No. of shares (m)         563.5  
Book value per share (Rs)*          89.2  
Price to book value (x)*          3.1  
* Book value as on 30th September 2013
Exceptional gains pertain to gain from part sale of stake in insurance subsidiary

What has driven performance in 2QFY14?
  • The Indian automobile industry continued to record subdued growth in 1HFY14. Volumes across products have declined with Commercial vehicles (CV) segment being largely hit. The domestic car and Utility vehicles (UV) segment reported CAGR growth of mere 1-3% in FY13, down from 5% a year ago. The entire 1HFY14 proved to be quite challenging for the CV segment. The heavy CVs segment reported 25% YoY decline in volumes during 1HFY14. That said, 2QFY14 volume pressures were offset by tractor sales that showed up fairly good performance.

  • Despite all the above challenges, Mahindra Finance continues to bank on its rural strengths and leadership position for vehicles and tractors. Operational efficiencies and asset quality form the thrust areas for the company. Given that the company has ties with most of the manufacturers, volumes should not be worrisome going forward.

  • The Assets under management (AUMs) for the company have recorded good growth of 31% YoY backed by robust loan book expansion of 33%. UVs, cars and tractor segments contributed largely to the AUM mix of the company.
    AUM mix
    (%) 2QFY13 2QFY14
    Auto / utility vehicles (M&M) 29 28
    Tractors (M&M) 19 19
    Cars and Non M&M UVs, Tractors & SCVs 32 33
    Commercial vehicles and construction equip. 13 12
    Used vehicles & others   7 8

  • However, the company turned cautious with the disbursements during 2QFY14. As a result, the disbursement growth was recorded at mere 5% on account of :
    1. Poor market conditions
    2. Curtailed exposure to heavy CV segment without making any alternate investment
    3. Higher interest rates that proved to be biggest deterrent
    4. Non-performance of certain geographies such as the southern markets

    Dynamic growth...
    (Rs m) 2QFY13 2QFY14 Change
    Assets under management 237,700 311,460 31.0%
    Advances 120,520 160,635 33.3%
    Borrowings 109,289 151,412 38.5%
    Credit borrowing ratio 110.3% 106.1%  

  • The net interest income (NII) performance for the quarter has been highly rewarding on the back of strong AUM growth. The NII grew by healthy 30% YoY during 2QFY14.

  • The yields for the quarter has shot up owing to change in product mix and passing through the higher rates to customers. However, this did not translate into higher spreads on account of higher cost of funds and hence margins too remained at stagnant levels of 7.4%. Rather higher borrowing costs driven by change in borrowing mix led to contraction of spreads from higher levels of 5.1% in 1HFY13 to 4.6% in 1HFY14. Going forward, the easing of borrowing costs will aid in retaining margins for Mahindra Finance.

  • The provisions for the quarter stood on a higher side and spiked by 51% YoY. The sale of repossessed stock has led to the increased loan loss provisions for the quarter. The credit cost as a percentage of AUM stood at 1.8% during 2QFY14. Despite higher provisioning, the profitability for the company grew at strong 21% YoY.

  • The asset quality for the company has deteriorated with gross NPAs increasing from 3.9% in 2QFY13 to 4.1% in 2QFY14. The net NPAs too have gone up to 1.9% levels during 2Q as against 1.5% a year ago. The company continues to lay greater emphasis on quality control and on the back of anticipated improvement in collection efficiencies, the company expects the recoveries to better in the forthcoming periods.

What to expect?

At the current price of Rs 278, the stock is trading at a multiple of 3.1 times the adjusted book value. We believe the company will continue to benefit from the growth in demand for credit from rural areas. The UVs, tractors, cars and second vehicles financing would remain the focus area for business growth going forward. Having said that the potential of slippage in asset quality and margins with rise in interest rate is a key concern. As the current valuations factor in all the positives, the stock should not be bought at current levels.

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