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Mah Fin.: Profit growth soars
Oct 25, 2012

Mahindra Finance declared its results for the second quarter of the financial year 2011-12 (2QFY13). The company has reported a 46% growth in income from operations while net profits have grown by 41% YoY. Here is our analysis of the results.

Performance summary
  • Income from operations grew by 46% YoY in 2QFY13, and 49% in 1HFY13.
  • Advances grew by 37% in the 1HFY13. Assets under management grew by 34% YoY.
  • Net NPAs to total advances increased to 1.4% in 1HFY13 from 1% previously.
  • Net interest margins increased from 6.3% in 1HFY12 to 7.3% in 1HFY13 due to higher lending yields.
  • Bottomline grows by 51% YoY during 1HFY13 and 41% during the 2QFY13 largely on the back of higher net interest income and other income.
  • Capital adequacy ratio stands at 16.5% at the end of 1HFY13.

Consolidated performance snapshot
Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Income from operations 6,654 9,698 45.8% 12,403 18,525 49.4%
Interest expense 2,627 4,015 52.9% 4,812 7,603 58.0%
Net Interest Income 4,027 5,682 41.1% 7,591 10,922 43.9%
Net interest margin       6.3% 7.3%  
Other Income 18 58 225.0% 76 91 19.3%
Other Expense 1,559 1,931 23.9% 3,004 3,717 23.7%
Provisions and contingencies 444 913 105.8% 1,059 1,840 73.8%
Profit before tax 2,043 2,897 41.8% 3,605 5,456 51.4%
Tax 675 967 43.2% 1,182 1,804 52.6%
Minority interest 3 5 80.6% 5 8 65.0%
Profit after tax/ (loss) 1,365 1,925 41.1% 2,418 3,645 50.7%
Net profit margin (%) 20.5% 19.9%   19.5% 19.7%  
No. of shares (m)         104.0  
Book value per share (Rs)*         320.6  
Price to book value (x)*         2.8  
* Book value as on 30th September 2012

What has driven performance in 1HFY13?
  • The auto sector did not have a great run in FY12, post two years of robust growth. The Society of Indian Automobile Manufacturers (SIAM) expects muted growth throughout FY13. However, Mahindra Finance, which caters primarily to the semi-urban and rural markets had a different growth story altogether. The company saw a 16% YoY growth in new customer contracts in 1HFY13. Despite higher lending rates, the lender still managed to grow its advances by 37% in 1HFY13. Growth continues to be robust on account of its diversified product mix, higher penetration into rural areas and is also higher in value terms as most manufacturers have hiked vehicle prices. The company usually sees better growth in the later part of the year due to the festival season and harvest period. However, it has managed strong growth in 1HFY13 as well.

  • NIMs continued to improve and stood at 7.3% at the end of 1HFY13, compared to 6.3% previously despite higher borrowing costs. Net spread increased to 5.1% from 4.8% previously.

    Dynamic growth...
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Advances 163,629   223,662   36.7%
    Borrowings 127,474   180,856   41.9%
    Secured 98,324 77.1% 134,356 74.3% 36.6%
    Unsecured 29,150 22.9% 46,500 25.7% 59.5%
    Credit borrowing ratio 128.4%   123.7%    

  • 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.

    Disbursement mix
    (%) 1HFY12 1HFY13
    Auto / utility vehicles 31 33
    Tractors 20 18
    Cars 27 26
    Commercial vehicles and construction eqip 12 11
    Used vehicles & others 10 12

  • During the quarter, the company has made an additional investment of Rs 123 m (US$ 2.21 m) in Mahindra Finance USA LLC, a Joint Venture company formed jointly with De Lage Landen Financial Services in the United States. During the quarter Mahindra Finance also approved the proposal for sale of 12.4% stake in its subsidiary. Mahindra Insurance Brokers to Inclusion Resources, a subsidiary of Leapfrog Financial Inclusion Fund for Rs 643 m, subject to approvals.

  • NPAs (non-performing assets) at the gross level moved lower from 4% in 1HFY12 to 3.9% in 1HFY13. The net NPA were higher at 1.4% at the end of 1HFY13 as compared to 1% of total assets at the end of 1HFY12. This was due to increased slippages on account of the delayed monsoons. Additional provisioning was taken in the unsecured lending space i.e. on personal loans and two wheelers on a conservative basis. The provision coverage ratio was 75.3% at the end of 1HFY12, which dropped to 63.5% at the end of September '12.

  • Its capital adequacy stands at 16.5% currently. Mahindra Finance informed the exchange that it plans to raise funds by an issue of equity shares for a consideration not exceeding Rs 9.25 bn by way of a Qualified Institutions Placement (QIP). This capital is being raised to supplement long term resources by way of enhancing the Tier I capital base. Since we don't have clarity on the price or when this offering will be completed, we have not yet factored this into our estimates.

What to expect?
At the current price of Rs 890, the stock is trading at a multiple of 2 times our estimated FY15 adjusted book value. Mahindra Finance has seen robust growth, despite a tough environment and high interest rates and the management continues to be bullish on the space. Rural customers were not as affected by the rate hikes, as the financier is able to adjust the EMIs according to its customers' cash flows. Plus, the company has been able to maintain conservative LTV ratios of 70-75%. Margins, improved as lending yields were also higher. However NIMs may contract going forward as the yields on commercial vehicles and cars are not as high as UVs and tractors.

Despite seeing some slippages this quarter, the company has maintained superior asset quality and continues to improve its operating efficiency. Mahindra Finance has also started being more conservative on securitization, despite RBI new guidelines on the same. Plus, it has stopped up-fronting income on securitization income, and only the spread is booked as income, which is amortized over the period of the loan. With the economy set for a slowdown, deficient monsoons and the RBI revising its projections for GDP growth downwards, rural cash flows may get affected. However, the second half of the year is better for the company on account of the festival season. Since the stock is currently trading over 34% higher than our recommended price we continue to maintain our SELL view as mentioned in our latest Midcap Select performance review.

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