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Mahindra Finance: Ratings and quality offer the kicker - Views on News from Equitymaster
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  • Oct 27, 2009 - Mahindra Finance: Ratings and quality offer the kicker

Mahindra Finance: Ratings and quality offer the kicker
Oct 27, 2009

Performance summary
  • Interest income grows by 8% YoY during both 1HFY10 and 2QFY10.
  • Advances grow by 3% YoY on the back of 7% YoY growth in assets under management. Incremental disbursements largely towards utility vehicles and cars.
  • Value of assets financed grew 9% YoY over the past 12 months.
  • Net interest margins remain stable at 6.9%; better credit rating from rating agencies on long term debt.
  • Bottomline grows by 76% YoY during 1HFY10; 97% YoY in 2QFY10 largely on the back of growth in other income and curtailment of operating expenses.
  • Capital adequacy ratio healthy at 17.7% at the end of 1HFY10.

Consolidated performance snapshot
Rs(m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Interest income 3,276 3,530 7.8% 6,222 6,732 8.2%
Interest expense 1,312 1,205 -8.2% 2,414 2,415 0.0%
Net Interest Income 1,964 2,325 18.4% 3,808 4,317 13.4%
Net interest margin       6.7% 6.9%  
Other Income 33 95 187.9% 81 186 129.6%
Other Expense 1,432 1,365 -4.7% 2,884 2,822 -2.1%
Provisions and contingencies 19 21 10.5% 40 45 12.5%
Profit before tax 546 1,034 89.4% 965 1,636 69.5%
Tax 194 342 76.3% 345 543 57.4%
Profit after tax/ (loss) 352 692 96.6% 620 1,093 76.3%
Net profit margin (%) 10.7% 19.6%   10.0% 16.2%  
No. of shares (m)       95.5 95.8  
Book value per share (Rs)*         164.7  
Price to book value (x)*         1.6  
* Book value as on 30th September 2009

What has driven performance in 2QFY10?
  • The economic slowdown as also the excess inventory pile up in the automobile sector added up to poor demand for loans from NBFCs like Mahindra Finance. Mahindra Finance, which is predominantly a financer of tractors and utility vehicles sold by M&M. The company saw the proportion of disbursements towards utility vehicles drop from 40% in September 2008 to 35% in September 2009. The proportion of disbursements towards cars (29%) and commercial vehicles (9%) increased while that towards tractors dropped marginally from 22% to 19% during the period.

    Cautious growth...
    (Rs m) 1HFY09 % of total 1HFY10 % of total Change
    Advances 74,772   77,206   3.3%
    Borrowings 58,649   58,173   -0.8%
    Secured 44,561 76.0% 47,613 81.8% 6.8%
    Unsecured 14,088 24.0% 10,560 18.2% -25.0%
    Credit borrowing ratio 127.5%   132.7%    

  • Mahindra Finance consciously adopted a cautious stance in the past few quarters with regard to margins and asset quality. Typical to their nature, the tractor loans yield the company superior spreads (in the range of 12% to 13%) but at the same time pose some delinquency problems. This led to the company compromising its margins for safer quality of assets.

    Disbursement mix
    (%) 1HFY09 FY09 1HFY10
    Auto / utility vehicles 39 38 35
    Tractors 24 25 23
    Cars 24 24 28
    Commercial vehicles 8 7 9
    Refinance 5 6 5

  • Mahindra Financeís other income base grew appreciably this quarter as the insurance distribution subsidiary along with the mutual fund distribution business and the rural home financing business (loan to asset of 20%) that are currently operating on a very low base, contributed handsomely due to improved disposable income in rural households as a result of the low interest rates and stimulus packages. Loans sanctioned under rural home financing were to the tune of Rs 885 m at the end of September 2009.

  • The lower interest rates led to lower delinquencies for the NBFC in the past few quarters. The NPAs at the gross level moved lower from 9.4% in 1HFY09 to 9% in 1HFY10. Also, due to higher provisioning and lower asset growth, the net NPA were lower at 2.8% at the end of 1HFY10 as compared to 4% of advances at the end of 1HFY09. The provision coverage ratio was 72% at the end of 1HFY10. Having said that, notwithstanding the shift from tractors to cars and utility vehicles, we believe that the company's asset quality will continue to be subject to slippages as long as the economic slump persists.

What to expect?
At the current price of Rs 261, the stock is trading at a multiple of 1.9 times our estimated FY11 adjusted book value. We had revised our estimates for the company taking into consideration the weak outlook for the automobile sector. However, the improved other income potential will also need to be looked into. Further the subsidy in borrowing costs for funding farm equipments provides the company substantial cushion in terms of margins. Control over asset quality and extending its advance base beyond parent M&Mís portfolio will be the key to the companyís growth in the longer term.

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