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Highlights of Q3FY11 results
Mahindra Finance (‘MMFS’) reported PAT of ~Rs1.16bn, a ~22% yoy growth – below our estimates of Rs1.3bn. The
underperformance can be attributed to standard asset provisions of Rs283m made in the quarter, per the recent RBI
norms. At the same time, business volumes remained robust with a 46% yoy rise in the loan book.
NII growth led by …: MMFS reported NII of ~Rs3.4bn – a strong 32% yoy growth, in-line with our estimates led by
robust disbursement growth. As expected, NIMs came-off by ~50bp qoq to 11.6% (net of securitization income).
Decline in NIMs can be attributed to increase in funding costs – to the tune of 40bp qoq to 8.4% as wholesale funding
costs rose steeply over the quarter. At the same time, loan yields were flat qoq (at 18.6%) owing to lagged impact of
asset re-pricing. MMFS had hiked lending rates by ~50bp in November and ~50bp more in December 2010 end. Pass
through of these hikes is likely to support margins in the near term. (Exhibit 1)
…strong business volumes: Business momentum was sustained as loan book expanded by 46% yoy (12% qoq) to
~Rs115bn. Disbursements during the quarter grew by a strong 80% yoy and 26% qoq to Rs29bn. The growth was led
by car loans (36% of total – up 700bp yoy). The management indicated that going forward, CVs and construction
equipment is expected to drive growth. (Exhibit 2)
Higher provisions – on account of standard provisioning: Per the RBI’s recent guideline mandating NBFCs to
maintain 25bp of standard asset provisioning, the lender booked Rs283m in Q3FY11 towards the same. As a result,
provisions increased by 63% qoq to Rs545m. However, NPA provisions were low at Rs260m, a 22% qoq decline.
Steady asset quality: Gross NPAs came in at 5.6% (against 5.6% in Q2FY11), a rise of Rs360m in absolute terms. Asset
quality has improved significantly on a yoy basis (Gross NPAs down ~310bp yoy) due to improved cashflows in rural
areas. Net NPAs were flat qoq at 1.1%. As a result, coverage ratio declined by ~90bp qoq, while remaining at elevated
level of 81.6%. Consequently, provisions as a proportion of average assets declined to 1.3% (as against 2.3% in
Q1FY11)
Loan book composition changes yoy: MMFS’ total advances grew by 46% yoy in Q3FY11. In-line with the industry
trend, share of cars in the lender’s total AuM has increased from 28% to 33% over the past twelve months. UVs
financed as a % of total AUM stood at 30%, lower than 35% in Q3FY10. (Exhibit 4)
Banks dominate funding mix: In Q3FY11, proportion of funds raised through term loans increased to 46.4% (from
40% in Q3FY10). Proportion of bonds declined to 21% (against 35% in Q3FY10). Share of CPs, rose from 1% to 9% in
Q3FY11. Bank loans continue to dominate the overall funding mix at 62% of total. (Exhibit 3).
Capital adequacy: Tier-I CRAR for MMFIN stands at 13.9% as of Dec-10 (against 14.7% in Q2FY11). Overall CRAR
stands at 17.4%. The company has a board approval to raise equity capital Rs5.7bn and intends to raise the same in the
near term (not factored into our numbers).
Valuations & View
In Q3FY11, MMFS’ operating performance was robust led by robust business volumes. While margins declined
sequentially, we expect gradual re-pricing of assets to aid NIM expansion over next couple of quarters. Importantly,
the company’s asset quality has shown remarkable improvement in recent past due to improving economic
environment and better collection efficiency. Moreover, the lender has fully provided for standard asset as per the
recent RBI directives. A play on buoyant rural consumption, we expect business momentum for MMFS to remain
robust over the next few quarters given the strong monsoons. While wholesale borrowing costs would inch up
hereon, MMFIN’s pricing power in its key markets would enable it to restrict the impact on margins. We expect
strong disbursement momentum to drive a 29% growth in NII. To factor in standard asset provisions booked in Q3,
we are downgrading our FY11 estimates by 2%. Reiterate Outperformer with a 12-month price target of Rs825 (~2.8x
FY12E adjusted book).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� �
Highlights of Q3FY11 results
Mahindra Finance (‘MMFS’) reported PAT of ~Rs1.16bn, a ~22% yoy growth – below our estimates of Rs1.3bn. The
underperformance can be attributed to standard asset provisions of Rs283m made in the quarter, per the recent RBI
norms. At the same time, business volumes remained robust with a 46% yoy rise in the loan book.
NII growth led by …: MMFS reported NII of ~Rs3.4bn – a strong 32% yoy growth, in-line with our estimates led by
robust disbursement growth. As expected, NIMs came-off by ~50bp qoq to 11.6% (net of securitization income).
Decline in NIMs can be attributed to increase in funding costs – to the tune of 40bp qoq to 8.4% as wholesale funding
costs rose steeply over the quarter. At the same time, loan yields were flat qoq (at 18.6%) owing to lagged impact of
asset re-pricing. MMFS had hiked lending rates by ~50bp in November and ~50bp more in December 2010 end. Pass
through of these hikes is likely to support margins in the near term. (Exhibit 1)
…strong business volumes: Business momentum was sustained as loan book expanded by 46% yoy (12% qoq) to
~Rs115bn. Disbursements during the quarter grew by a strong 80% yoy and 26% qoq to Rs29bn. The growth was led
by car loans (36% of total – up 700bp yoy). The management indicated that going forward, CVs and construction
equipment is expected to drive growth. (Exhibit 2)
Higher provisions – on account of standard provisioning: Per the RBI’s recent guideline mandating NBFCs to
maintain 25bp of standard asset provisioning, the lender booked Rs283m in Q3FY11 towards the same. As a result,
provisions increased by 63% qoq to Rs545m. However, NPA provisions were low at Rs260m, a 22% qoq decline.
Steady asset quality: Gross NPAs came in at 5.6% (against 5.6% in Q2FY11), a rise of Rs360m in absolute terms. Asset
quality has improved significantly on a yoy basis (Gross NPAs down ~310bp yoy) due to improved cashflows in rural
areas. Net NPAs were flat qoq at 1.1%. As a result, coverage ratio declined by ~90bp qoq, while remaining at elevated
level of 81.6%. Consequently, provisions as a proportion of average assets declined to 1.3% (as against 2.3% in
Q1FY11)
Loan book composition changes yoy: MMFS’ total advances grew by 46% yoy in Q3FY11. In-line with the industry
trend, share of cars in the lender’s total AuM has increased from 28% to 33% over the past twelve months. UVs
financed as a % of total AUM stood at 30%, lower than 35% in Q3FY10. (Exhibit 4)
Banks dominate funding mix: In Q3FY11, proportion of funds raised through term loans increased to 46.4% (from
40% in Q3FY10). Proportion of bonds declined to 21% (against 35% in Q3FY10). Share of CPs, rose from 1% to 9% in
Q3FY11. Bank loans continue to dominate the overall funding mix at 62% of total. (Exhibit 3).
Capital adequacy: Tier-I CRAR for MMFIN stands at 13.9% as of Dec-10 (against 14.7% in Q2FY11). Overall CRAR
stands at 17.4%. The company has a board approval to raise equity capital Rs5.7bn and intends to raise the same in the
near term (not factored into our numbers).
Valuations & View
In Q3FY11, MMFS’ operating performance was robust led by robust business volumes. While margins declined
sequentially, we expect gradual re-pricing of assets to aid NIM expansion over next couple of quarters. Importantly,
the company’s asset quality has shown remarkable improvement in recent past due to improving economic
environment and better collection efficiency. Moreover, the lender has fully provided for standard asset as per the
recent RBI directives. A play on buoyant rural consumption, we expect business momentum for MMFS to remain
robust over the next few quarters given the strong monsoons. While wholesale borrowing costs would inch up
hereon, MMFIN’s pricing power in its key markets would enable it to restrict the impact on margins. We expect
strong disbursement momentum to drive a 29% growth in NII. To factor in standard asset provisions booked in Q3,
we are downgrading our FY11 estimates by 2%. Reiterate Outperformer with a 12-month price target of Rs825 (~2.8x
FY12E adjusted book).
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