Mah Fin.: NIMs up despite higher costs - Views on News from Equitymaster

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Mah Fin.: NIMs up despite higher costs

Oct 28, 2011

Mahindra Finance declared its results for the second quarter of the financial year 2011-12 (2QFY12). The company has reported a 39% growth in interest income while net profits have grown by 11% YoY. Here is our analysis of the results.

Performance summary
  • Interest income grows by 39% YoY 2QFY12, and 40% in 1HFY12.
  • Advances grow by 52% in the 1HFY12. Assets under management grow by 41% YoY.
  • Net NPAs to total advances improve marginally to 1% in 1HFY12 from 1.1% previously.
  • Net interest margins increased from 5.5% in 1HFY11 to 6.3% in 1HFY12 due to higher lending yields.
  • Bottomline grows by 19% YoY during 1HFY12 and 10.6% during the 2QFY12 largely on the back of higher interest costs and provisioning.
  • Capital adequacy ratio stands at 17.3% at the end of 1HFY12.

Consolidated performance snapshot
Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 4,858 6,773 39.4% 8,902 12,495 40.4%
Interest expense 1,531 2,627 71.6% 2,859 4,812 68.3%
Net Interest Income 3,327 4,146 24.6% 6,043 7,683 27.1%
Net interest margin       5.5% 6.3%  
Other Income 74 91 23.5% 156 215 37.7%
Other Expense 1,182 1,601 35.5% 2,208 3,084 39.7%
Provisions and contingencies 369 594 60.8% 945 1,209 27.9%
Profit before tax 1,850 2,043 10.4% 3,046 3,605 18.4%
Tax 615 677 10.0% 1,011 1,180 16.8%
Profit after tax/ (loss) 1,235 1,366 10.6% 2,035 2,424 19.1%
Net profit margin (%) 25.4% 20.2%   22.9% 19.4%  
No. of shares (m)         104.0  
Book value per share (Rs)*         266.0  
Price to book value (x)*         2.5  
* Book value as on 30th September 2011

What has driven performance in 1HFY12?
  • Robust rural cashflows and a better monsoon during the year contributed to a good performance for the lender. Customer contracts increased by 25% during the first half. Despite multiple rate hikes, the lender still managed to grow its advances by 51.6% in 1HFY12. The company also added over 20 new branches during the first half to be able to capture higher growth expected in the second half of the year (festival season). The rural market for vehicles continues to be more buoyant that the urban market. Most car manufacturers are looking at rural India to offset slowing growth in urban areas, and Mahindra Finance is thus a key beneficiary of this shift. Having said that we clearly do not see the current growth rates being sustainable for the longer term.

    Dynamic growth...
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 107,887   163,517   51.6%
    Borrowings 82,935   127,474   53.7%
    Secured 63,753 76.9% 98,324 77.1% 54.2%
    Unsecured 19,182 23.1% 29,150 22.9% 52.0%
    Credit borrowing ratio 130.1%   128.3%    

  • 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 commercial vehicles.

    Disbursement mix
    (%) 1HFY11 1HFY12
    Auto / utility vehicles 30 27
    Tractors 21 20
    Cars/Others** 33 32
    Commercial vehicles 7 11
    Used vehicles & others 9 10
    ** Others include non-M&M utility vehicles

  • NPAs (non-performing assets) at the gross level moved lower from 5.8% in 1HFY11 to 4% in 1HFY12. Also, due to higher provisioning, the net NPA were lower at 1.0% at the end of 1HFY12 as compared to 1.1% of total assets at the end of 1HFY11. The provision coverage ratio was 75.3% at the end of 1HFY12. The company has invested in a legal system in a number of states, which has helped it recover some of its bad loans.

  • Its capital adequacy stands at over 17% currently and thus capital raising on the Tier 1 front (currently 14.7%) is not in the offing in the near term. However the company may use its Tier II headroom or securitization of assets can be done as and when the regulation gets more streamlined.

What to expect?
At the current price of Rs 670.7, the stock is trading at a multiple of 1.9 times our estimated FY14 adjusted book value. The company has seen robust growth, despite a tough environment and high interest rates. While its rural customers were not as affected by the rate hikes, Mahindra Finance saw a huge spike in its cost of funds. Margins did not contract however as lending yields were also higher. But, this may not be sustainable as it will have to soon borrow money at higher rates.

Mahindra Finance is one of the preferred financiers for Maruti and lends for around 9,000 cars a month. Despite the prolonged strike at the Manesar plant, Mahindra Finance was not affected. However, due to expensive loans on account of the RBI's 13th rate hike, purchases of passenger cars may get affected. Rural demand for other vehicles may not dry up even with high interest rates. However, with the economy set for a slowdown, and the RBI revising its projections for growth downwards, rural cash flows may get affected. Thus, going forward loan growth may get moderated. In light of the current environment and its current valuations we reiterate our negative view on the stock.

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