Mahindra & Mahindra Financial: Revving up the rural rally, upgrade to BUY:: Kotak Sec

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Mahindra & Mahindra Financial (MMFS)
Banks/Financial Institutions
Revving up the rural rally, upgrade to BUY. Mahindra Finance reported PAT of
Rs1.16 bn, up 68% yoy and 8% above estimates. Loan growth acceleration to 33%
(from 3% in 2QFY10) and NPL recoveries have lifted earnings. We believe the normal
monsoon this year will provide a further boost over the next few quarters, thereby
driving earnings for MMFSL despite likely pressure on margins. The stock has corrected
recently from its highs even as the business performance is improving. Revise estimates,
upgrade to BUY with price target of Rs750.


In for a strong growth traction
Mahindra Finance (MMFSL) reported core PBT of Rs1.9 bn, up 32% yoy - in line with estimates.
Loan growth was strong at 33% yoy on the back of 54% growth in disbursements. The share of
used vehicles and cars in the overall disbursements has increased by 4%, while UVs have grown at
a slower pace. The company now finances about 9,000 Maruti cars per month as compared to
4,500 a year ago Management highlighted that with an upturn in the CV cycle, financing of CVs is
also picking up.
Strong pre-monsoon growth is an encouraging trend. The sharp traction in business volumes
before the second half (i.e., getting clear signs of a normal monsoon) indicates the underlying
income buoyancy in rural India and clearly inspires confidence in business prospects for the
company. We are raising our loan growth estimates to 40% and 24% for FY2011E and FY2012E
from 31% and 22%, respectively.
Margins above estimates, we model compression in FY2012E
MMFSL report NIM (as per KS calculations) of 12.5% as compared to 11.5% in 1QFY11 and
11.3% estimated by us. Management has highlighted that change in business mix and strong
improvement in recoveries boosted margins. We are modeling NIM of 12.3% and 11.7% for
FY2011E and FY2012E. We believe that sharp improvement in recoveries will keep support
margins up in 2HFY11 even as spreads may be under some pressure due to a rise in bulk
borrowings rates. About 8% of MMFSL’s borrowings have a floating rate even as its entire loan
book carries a fixed rate.