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KMFL: Signs of improvement

Nov 23, 2001

Kotak Mahindra Finance Limited (KMFL) managed to trim the drop in earnings by cost cutting measures. The company reported a 19% fall in FY01 profits on the back of a 23% decline in income from operations.

(Rs m)2QFY012QFY02Change1HFY011HFY02Change
Income from operations 440 373 -15.2% 889 839 -5.7%
Other income 117 120 2.0% 244 238 -2.8%
Financial expenses 278 221 -20.6% 555 459 -17.3%
Operating Profit 162 153 -5.8% 334 380 13.7%
Operating Profit Margin (%)36.8%40.9%37.6%45.3%
Operating expenses 109 93 -14.6% 196 191 -2.6%
Profit before tax1701795.2%38242711.6%
Provision & write off2301145%1973282.4%
Tax 55 43 -22.7% 100 110 10.0%
Profit after Tax/(Loss) 113 107 -5.7% 263 244 -7.4%
Net profit margin (%)25.7%28.6%29.6%29.1%
No. of Shares (eoy) (m) 45.9 59.2 45.9 59.2
Diluted Earnings per share 7.6 7.2 8.9 8.2
P/E (at current price) 7 6

During the first half, KMFL's interest margins improved sharply due to a 22% reduction in core interest cost. This coupled with reduction in operating cost improved PBT margins of the company to 51% from 43% in the comparable previous period. In the first half, the company's cost to income ratio reduced to 31% on the back of a 22% fall in advertisement expenses. KMFL has smartly curtailed the ad expenses despite increasing competition in the sector. The benefits of this are however, negated to an extent due to 9 fold increase in loss on sale of assets.

KMFL's new initiatives is reflected in its comparatively better financial performance. It has entered into the securities brokerage business (through Kotak Securities) and forex brokerage business (through Kotak Forex Brokerage Ltd.). KMFL has also applied to the RBI for a banking licence. Going forward, its subsidiaries are expected to contribute a major proportion to its revenue base. The contribution of other income to total income has already increased to 24% in the second quarter of the current fiscal from 21% in 2QFY01.

The company's core business of asset finance has also shown good growth in disbursements. Commercial vehicle disbursements have grown by about 80% from the previous half year, with significant gains in market share. Lower interest rates fueled the vehicle financing business of the company. Going forward, the business is likely to reap more benefits with interest rates remaining on the lower side.

At the current market price of Rs 48, KMFL is trading at P/E of 6x and Price/Book value ratio of just 0.6x. In the past, the company has enjoyed Price/Book value ratio in the range of 1-3 times.

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