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Mahindra Finance: Margins take the blow - Views on News from Equitymaster

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Mahindra Finance: Margins take the blow
Oct 31, 2008

Performance summary
  • Interest income grows by 17% YoY in 1HFY09 on the back of a tepid 12% YoY growth in advances.

  • Net interest margin drops by a sharp 2.8% to 6.3% in 1HFY09 due to lower spreads on tractor loans.

  • Net NPA levels remain at 4% in 1HFY09 with higher delinquency on tractor loans.

  • Cost to income ratio rises to 40% from 35% in 1HFY08 due to increased staff costs.

  • Bottomline grows by 5% YoY; further impacted by lower other income.



Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest income 2,876 3,276 13.9% 5,322 6,223 16.9%
Interest expense 1,085 1,312 20.9% 2,117 2,414 14.0%
Net Interest Income 1,791 1,964 9.7% 3,205 3,809 18.8%
Net interest margin (%)       9.5% 6.3%  
Other Income 51 33 -35.3% 100 81 -19.0%
Other Expense 692 753 22.7% 1,248 1,349 36.5%
Provisions and contingencies 569 698 -6.0% 1,155 1,577 6.9%
Profit before tax 581 546 -6.0% 902 964 6.9%
Tax 203 194 -4.4% 311 345 10.9%
Profit after tax/ (loss) 378 352 -6.9% 591 619 4.7%
Net profit margin (%) 13.1% 10.7%   11.1% 9.9%  
No. of shares (m)       84.0 95.4  
Book value per share (Rs)         144.1  
P/BV (x)*         1.3  
*Book value as on 30th September 2008

What has driven performance in 2QFY09?
  • With the outlook for the auto-manufacturing sector being muted, auto financers are not having their growth prospects very stable in the medium term. Mahindra Finance consciously adopted a cautious stance in the previous quarter with regard to margins and asset quality and grew its advance base by merely 12% YoY in 1HFY09. Also, the company shifted its focus from tractor / farm lending to passenger car and CV financing, which had a severe impact on the net interest margins (NIMs). Typical to their nature, the tractor loans yielded the company superior spreads (in the range of 12% to 13%) but at the same time posed some delinquency problems. This led to the company compromising its margins for safer quality of assets.

    Slowdown imminent...
    (Rs m) 1QFY08 % of total 1QFY09 % of total Change
    Advances 66,718   74,979   12.4%
               
    Borrowings 59,321   57,126   -3.7%
    Secured 44,710 75.4% 44,899 78.6% 0.4%
    Unsecured 14,611 24.6% 12,227 21.4% -16.3%
    Credit borrowing ratio 112.5%   131.3%    

  • Mahindra Finance’s other income base failed to grow in 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, failed to contribute due to lower disposable income in rural households as a result of the high interest and inflation levels.

  • The rise in interest rates has impacted the incremental demand for tractors and farm equipments in recent months as well as led to higher delinquencies. The NPAs at the gross as well as net levels moved up from 7.6% to 9.4% and 2.9% to 4.0% of advances during the first six months of FY09. Being the largest player financing this segment, Mahindra Finance's asset book remains susceptible to the volatility of farmers’ income levels. Also, notwithstanding the shift from tractors to cars and commercial vehicles, the company's asset quality will continue to be subject to slippages due to this reason.

What to expect?
    At the current price of Rs 190, the stock is trading at 1.3 times our estimated FY11 adjusted book value. We have revised our estimates for the company taking into consideration the weak outlook for the automobile sector. Nonetheless, its niche presence in the high-yielding tractor and used vehicle financing business earns Mahindra Finance an edge over its peers in terms of net interest margins. Further the subsidy in borrowing costs for funding farm equipments provides substantial cushion in a rising interest rate scenario. Also, the NBFC's well-entrenched reach and opportunity of financing Punjab Tractors' vehicles offers some upsides in the longer term.

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