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Mah Finance.: Another disappointing quarter - Views on News from Equitymaster
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Mah Finance.: Another disappointing quarter
Oct 31, 2014

Mahindra Finance declared its results for the second quarter (2QFY15) and first half of the financial year (1HFY15). The company reported a 10.6% YoY growth in net interest income while net profits declined by 5.7% YoY during 2QFY15. For 1HFY15, the profits were down by 10.7% YoY. Here is our analysis of the results.

Performance summary
  • Income from operations grows by 14.1% YoY in 2QFY15 and 16.1% YoY for 1HFY15 backed by 15% YoY growth in assets under management.
  • While the loan growth remains stable, the value of assets financed declines by 7% YoY during 1HFY15.
  • Net interest margins increase to 7.6% in 1HFY15 from 7.4% in 1HFY14 on account of stable interest income.
  • Cost to income ratio spikes to 35.4% levels in 2QFY15.
  • Bottom-line declines by 10.7% YoY during 1HFY15 on account of staggering 78.7% YoY growth in provisions.
  • Net NPA to total advances went up to 3.1% at the end of 1HFY15 (1.9% in 1HFY14).

Consolidated performance snapshot
Rs (m) 1QFY14 1QFY15 Change 1HFY14 1HFY15 Change
Income from operations 12,858 14,676 14.1%  24,505 28,444 16.1%
Interest expense 5,477 6,513 18.9%  10,425 12,774 22.5%
Net Interest Income 7,381 8,163 10.6%  14,080 15,670 11.3%
Net interest margin       7.4% 7.6%  
Other Income 49 73 49.3% 108  149 38.0%
Other Expense 2,555 2,919 14.3%  6,193 7,456 20.4%
Provisions and contingencies 1,286 1,897 47.5%  1,302 2,325 78.7%
Profit before tax 3,589 3,421 -4.7%  6,694 6,038 -9.8%
Exceptional gains / losses            
Tax 1,236 1,201 -2.8%  2,295 2,104 -8.3%
Profit after tax/ (loss) 2,353 2,219 -5.7%  4,399 3,934 -10.6%
Minority interest  28 26 -8.3%  43  45 4.7%
Net Profit to equity shareholders 2,325 2,194 -5.7%  4,356 3,889 -10.7%
Net profit margin (%) 18.1% 14.9%   17.8% 13.7%  
No. of shares (m)         564.0  
Book value per share (Rs)*         95.9  
Price to book value (x)*         3.0  
* Book value as at the end of September 2014

What has driven performance in 2QFY15?
  • The decline in profitability for the company can be largely attributed to higher provisions. While the loan growth has remained stable, the asset quality continues to deteriorate. Delayed monsoons, floods in certain geographies, stretched customers’ cash flows resulted in weak credit off-take in vehicles and tractors segments and poor loan repayments. Thus, the earnings performance of the company remained under pressure for th entire first half of FY15.

  • Notwithstanding the challenges, the assets under management registered a growth of 15% YoY, thanks to the healthy growth in utility vehicles and used-vehicles segments. But the total assets financed by the company have declined by 7% YoY during 1HFY15 primarily due to stress in CV segment.

  • The margins for the company has gone up YoY, however, the spreads for the quarter have narrowed down. Moreover, the company has changed the borrowing mix with higher exposure towards banks. With large proportion of high yielding assets, Mahindra Finance is expected to maintain margins going forward.

  • The provisions grew by a staggering 78.7% YoY during 1HFY15 and proved as a major deterrent to the earnings performance of the company. This coupled with higher stock of bad loans added to the woes of Mahindra Finance. The gross NPAs have gone up from 4.1% in 2QFY14 to higher levels of 6.3% during 2QFY15. Net NPAs have surpassed 3% levels and indicate that asset quality pressures are here to stay for the company. Stress in the CV and the car segments have been largely responsible for the deteriorating credit quality of Mahindra Finance.
What to expect?
At the current price of Rs 289, the stock is trading at a multiple of 2.6 times our estimated FY16 adjusted book value.

Subdued economic activity, sluggish auto market and business cyclicality have been the major dampeners to the earnings growth of Mahindra Finance. The 1HFY15 marked sharp deterioration in asset quality for Mahindra Finance with company reporting highest NPLs in the industry. This coupled with higher provisions continue to depress the earnings for the company. We have highlighted earlier that the asset quality pressures are here to stay and the loan book consolidation would continue to hamper the earnings performance of the company in the near term.

While the medium-term pressures remain, we recommend investors to not buy the stock at current levels. We also advise the ones holding the stock to maintain sufficient margin of safety; given the weak credit quality of the company. Kindly ensure that no stock forms more than 5% of your portfolio.

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