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Mah Fin.: Strong, quality asset growth - Views on News from Equitymaster

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Mah Fin.: Strong, quality asset growth
Oct 23, 2010

Mahindra Finance declared its 2QFY11 results. The company has reported a 35% growth in interest income while net profits have grown by 72% YoY. Here is our analysis of the results.

Performance summary
  • Interest income grows by 35% YoY 2QFY11, and 30% in 1HFY11.
  • Advances grow by 35% in the 1HFY11. Assets under management grow by 32% YoY.
  • Net NPAs to total advances improve to 1.1% in 1HFY11 from 2.8% previously.
  • Net interest margins drop from 6.0% in 1HFY10 to 5.5% in 1HFY11 due to higher interest costs.
  • Bottomline grows by 77% YoY during 1HFY11 and 72% during the 2QFY11 largely on the back of growth in interest income and write back of provisioning.
  • Capital adequacy ratio stands at a healthy at 16.5% at the end of 1HFY11.


Consolidated performance snapshot
Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest income 3,593 4,858 35.2% 6,868 8,902 29.6%
Interest expense 1,206 1,531 26.9% 2,418 2,859 18.2%
Net Interest Income 2,387 3,327 39.4% 4,450 6,043 35.8%
Net interest margin       6.0% 5.5%  
Other Income 87 74 -14.9% 172 156 -9.4%
Other Expense 784 1,182 50.7% 1,481 2,208 49.1%
Provisions and contingencies 618 369 -40.3% 1,420 945 -33.4%
Profit before tax 1,072 1,850 72.6% 1,720 3,046 77.0%
Tax 354 615 73.5% 572 1,011 76.8%
Profit after tax/ (loss) 717 1,235 72.2% 1,149 2,035 77.2%
Net profit margin (%) 20.0% 25.4%   16.7% 22.9%  
No. of shares (m)       96.9 96.9  
Book value per share (Rs)*         200.0  
Price to book value (x)*         3.5  
* Book value as on 30th September 2010

What has driven performance in 2QFY11?
  • The robust 82% 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 cash flows in rural India. A better monsoon during the year also contributed to a good performance. The economic recovery has been showing in higher auto sector volumes. The resurgence in demand for car and CV loans provided a big boost to Mahindra Financeís performance in 2QFY11. It saw a 35% growth in advances during 1HFY10. The company also added around 50 new branches during the first half to be able to capture higher growth expected in the second half of the year (festival season). Having said that we clearly do not see the current growth rates being sustainable for the longer term.

    Dynamic growth...
    (Rs m) 1HFY10 % of total 1HFY11 % of total Change
    Advances 77,539   104,565   34.9%
               
    Borrowings 58,179   82,935   42.6%
    Secured 47,744 82.1% 63,753 76.9% 33.5%
    Unsecured 10,435 17.9% 19,182 23.1% 83.8%
    Credit borrowing ratio 133.3%   126.1%    

  • Mahindra Finance, which was once predominantly a financer of tractors and utility vehicles sold by M&M, now has an almost 50:50 mix of M&M and non M&M vehicles, thus de-risking its portfolio to some extent. It saw most of its incremental disbursements go to cars and non M&M utility vehicles.

    Disbursement mix
    (%) 2QFY10 2QFY11
    Auto / utility vehicles 35 30
    Tractors 19 21
    Cars/Others** 29 33
    Commercial vehicles 9 7
    Used vehicles &others 8 9
    ** Others include non-M&M utility vehicles

  • NPAs (non-performing assets) at the gross level moved lower from 9% in 2QFY10 to 5.8% in 2QFY11. Also, due to higher provisioning, the net NPA were lower at 1.1% at the end of 2QFY11 as compared to 2.8% of total assets at the end of 2QFY10. The provision coverage ratio was 82.5% at the end of 2QFY11. The company has invested in a legal system in a number of states, which has helped it recover some of its bad loans.

  • On anticipation of further rate hikes from the RBI to curb liquidity, the company may decide to pass on higher interest rates to its customers post the festival season. Since Mahindra Finance is present in the semi-urban and rural areas, where other players are not competing, it does now face much pressure on loan pricing. It is able to adjust its LTV (loan to value) ratio and its lending period in order to match its interest income to its customerís cash flows. Having said that, higher interest rates may cause some customers to either slip on payments or defer their purchases.

What to expect?
At the current price of Rs 701, the stock is trading at a multiple of 2.2 times our estimated FY13 adjusted book value. Although the subsidy in borrowing costs for funding farm equipments (tractors) provides the company some cushion, the current margins may be unsustainable. The company has a capital adequacy ratio of 16.5% currently, from 17.7% in 2QFY10. In order to continue to grow robustly, it may need to tap the equity markets within a few quarters to be able to maintain sufficient capital cushion.

The company's focus on home loans also has the potential to bring in some asset liability mismatches. In addition passing on higher rates to customers in the second half may lead to some slippages. We maintain our cautious stance on the stock. (Research pro subscribers can click here for the latest update on the company.)

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