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Mahindra & Mahindra Financial Services Ltd
Mahindra & Mahindra Financial Services Ltd (MMFSL) reported PAT of `1158
million, up by 24% on YoY basis. Healthy loan growth enabled strong growth in
NII of 36%. Asset quality performance appears on track as indicated by low NPAs.
KEY HIGHLIGHTS FOR 3Q FY11:
MMFSL’s disbursements grew by 79% YoY in 2QFY11 to `42.4 billion. The
company has indicated that there is significant opportunity in the new segments
namely- Commercial vehicle space including construction equipment space, used
vehicle finance. Going forward, we expect the car financing, CV financing
(including construction equipment financing) and refinance segment to be the
major growth drivers for MMFSL.
Net interest income grew by 36% during 3QFY11 while the net profits registered
a growth of 25% during 3QFY11. During the quarter the company has increased
the lending rates, however the aggressive increase in the cost of funds put
pressure on the margins for the company.
On a YoY basis both the Gross as well as Net NPA’s have reduced mainly on
account of improved cash flows. In line with the RBI directive, the company has
created a one-time provisioning of `2.8 billion on standard assets
MMFSL has a capital adequacy ratio of 17.4% as on Dec 2010 against the
requirement of 12%.
Valuation and Recommendation
MMFSL reported strong growth in disbursements during the 3QFY11, which led to
a growth of 36% in net interest Income. Considering the traction witnessed in
disbursements we expect a 39% CAGR in disbursements during FY10-12. We
expect the net interest income to register a CAGR of 33% and net profits to register
a CAGR of 34% during FY10-12. We recommend, “ACCUMULATE” on
Mahindra and Mahindra financial services ltd for a target price of `778. (Implying
a 3x multiple to its book value of ` 259 for FY12).
Disbursement growth
MMFSL’s disbursements grew by 79% YoY in 2QFY11 to `42.4 billion. The
disbursement mix continues to undergo change with the focus of the company
shifting to cars as well as the CV financing segment. With growth being led by the
car segment the share of this segment in the total disbursement has gone up from
29% in 3QFY10 to 33% in 3QFY11.
The company has indicated that there is significant opportunity in the new
segments namely- Commercial vehicle space including construction equipment
space, used vehicle finance, housing loan segment.
Commercial vehicle space (including construction equipment financing)-
At present this contributes 7% of the book and management expect the share of
this segment to reach a sizeable 15% in near term.
M&M’s foray into heavy commercial vehicles segment in partnership with
Navistar is expected to drive disbursements for this segment. The venture
is expected to sell around 25000 units in FY11 of which MMFSL is
targeting 20% of the sales. The loan to value expected in this segment is
75%.
In the construction equipment space the company is targeting to lend to
the subcontractor segment. The company is witnessing a lot of
construction activity picking up in the rural areas and expects to benefit
out of the same. The company is financing around 8-10 vehicles in a
month at present and is hoping to increase the same to about 35-40
vehicles a month. The company is looking for tie-ups in this segment after
achieving a particular scale. Out of 15%, the share of this segment is likely
to be 3%. With yields in the range of 13-14% for this segment, the
margins are likely to be in the range of 3-4%. The company is eyeing an
AUM of `30 billion by FY13.
MMFSL also expects the used vehicle car financing as a high-potential
opportunity. Earlier the company was financing 1,000 vehicles, which has now
gone upto 1800 vehicles. Maruti off late has got very aggressive where it is
intends to commence True value stores at every dealer, which MMFSL eyes as
an opportunity. These are high yielding segments where the average yields are
about 23-24%. Therefore with the increase in the share of this segment in the
total disbursements we believe that this will improve the yields for the
company. The company is eyeing an AUM of `20 billion by FY13.
Going forward as well, we expect the car financing, CV financing (including
construction equipment financing) and refinance segment to be the major growth
drivers for MMFSL. Considering the robust growth witnessed by MMFSL in
disbursements, we expect the disbursements to register a 41% CAGR during FY10-
12.
Borrowing profile
The borrowing profile has also undergone a change in 3QFY11 as the share of
NCD in total borrowings declined while that of banks increased. MMFSL also has
resorted to short term borrowings during the quarter in the form of commercial
papers with the share of this source increasing from 8% in 2QFY11 to 11% during
3QFY11. However bank continues to be major source of borrowings for MMFSL.
Asset quality remains strong
The asset quality has witnessed significant improvement with the Gross NPAs
declining from 8.7% as on 3QFY10 to 5.6% as on 3QFY11 versus 5.8% as on
2QFY11. The Net NPAs has declined on a YoY from 2.3% as on 3QFY10 to 1.1%
as on 3QFY11. The management has indicated that the cash collections are
improving in the rural areas. Going forward as well the asset quality is expected to
improve. In line with the RBI directive, the company has created a one-time
provisioning of `2.8 billion on standard assets reflected as an exceptional item in
the profit and loss account.
Capital Adequacy
MMFSL has a capital adequacy ratio of 17.4% as on Dec 2010 against the
requirement of 12%. With robust growth being witnessed in business, the company
has indicated the need for capital for which they have already passed a resolution
for a QIP.
Net Interest Margins
With the general increase in the interest rates, the cost of funds increased, however
the company has increased its lending rates by 50 bps each in Nov and Dec 2010.
As a result the lending rates have gone up during the quarter, however the increase
in the cost of funds have not offset the increase in the lending rates. Therefore
margins have been under pressure. Going forward as well, we expect the net
interest margins to decline from 11.3% as on FY10 to 11.1% as on FY12.
Rural Housing
Rural housing finance arm of MMFSL reported net profits of `61 million during
the nine months ended Dec 2010. The loan book has expanded from `2,110 million
in 2QFY11 to `2577 million in 3QY11. Although the current AUM in the rural
housing finance business is a mere `1.7bn, the management intends to scale this
business to the size of `12 billion by FY13 and hope to achieve a scale of `60
billion by FY16. The average ticket size of loans in this segment is `0.2 million.
The asset quality is robust in this segment with zero NPA levels. Although the
contribution from this segment is insignificant at present, we believe that this
segment would be the next growth driver for the company. However we have not
factored any potential revenues from these segments in our future earnings
estimates.
Valuation and Recommendation
MMFSL reported strong growth in disbursements during the 3QFY11, which led to
a growth of 36% in net interest Income. Considering the traction witnessed in
disbursements we expect a 39% CAGR in disbursements during FY10-12. We
expect the net interest income to register a CAGR of 33% and net profits to register
a CAGR of 34% during FY10-12. We recommend “ACCUMULATE” on
Mahindra and Mahindra financial services ltd for a target price of `778.(Implying a
3x multiple to its book value of `259 for FY12).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra Financial Services Ltd
Mahindra & Mahindra Financial Services Ltd (MMFSL) reported PAT of `1158
million, up by 24% on YoY basis. Healthy loan growth enabled strong growth in
NII of 36%. Asset quality performance appears on track as indicated by low NPAs.
KEY HIGHLIGHTS FOR 3Q FY11:
MMFSL’s disbursements grew by 79% YoY in 2QFY11 to `42.4 billion. The
company has indicated that there is significant opportunity in the new segments
namely- Commercial vehicle space including construction equipment space, used
vehicle finance. Going forward, we expect the car financing, CV financing
(including construction equipment financing) and refinance segment to be the
major growth drivers for MMFSL.
Net interest income grew by 36% during 3QFY11 while the net profits registered
a growth of 25% during 3QFY11. During the quarter the company has increased
the lending rates, however the aggressive increase in the cost of funds put
pressure on the margins for the company.
On a YoY basis both the Gross as well as Net NPA’s have reduced mainly on
account of improved cash flows. In line with the RBI directive, the company has
created a one-time provisioning of `2.8 billion on standard assets
MMFSL has a capital adequacy ratio of 17.4% as on Dec 2010 against the
requirement of 12%.
Valuation and Recommendation
MMFSL reported strong growth in disbursements during the 3QFY11, which led to
a growth of 36% in net interest Income. Considering the traction witnessed in
disbursements we expect a 39% CAGR in disbursements during FY10-12. We
expect the net interest income to register a CAGR of 33% and net profits to register
a CAGR of 34% during FY10-12. We recommend, “ACCUMULATE” on
Mahindra and Mahindra financial services ltd for a target price of `778. (Implying
a 3x multiple to its book value of ` 259 for FY12).
Disbursement growth
MMFSL’s disbursements grew by 79% YoY in 2QFY11 to `42.4 billion. The
disbursement mix continues to undergo change with the focus of the company
shifting to cars as well as the CV financing segment. With growth being led by the
car segment the share of this segment in the total disbursement has gone up from
29% in 3QFY10 to 33% in 3QFY11.
The company has indicated that there is significant opportunity in the new
segments namely- Commercial vehicle space including construction equipment
space, used vehicle finance, housing loan segment.
Commercial vehicle space (including construction equipment financing)-
At present this contributes 7% of the book and management expect the share of
this segment to reach a sizeable 15% in near term.
M&M’s foray into heavy commercial vehicles segment in partnership with
Navistar is expected to drive disbursements for this segment. The venture
is expected to sell around 25000 units in FY11 of which MMFSL is
targeting 20% of the sales. The loan to value expected in this segment is
75%.
In the construction equipment space the company is targeting to lend to
the subcontractor segment. The company is witnessing a lot of
construction activity picking up in the rural areas and expects to benefit
out of the same. The company is financing around 8-10 vehicles in a
month at present and is hoping to increase the same to about 35-40
vehicles a month. The company is looking for tie-ups in this segment after
achieving a particular scale. Out of 15%, the share of this segment is likely
to be 3%. With yields in the range of 13-14% for this segment, the
margins are likely to be in the range of 3-4%. The company is eyeing an
AUM of `30 billion by FY13.
MMFSL also expects the used vehicle car financing as a high-potential
opportunity. Earlier the company was financing 1,000 vehicles, which has now
gone upto 1800 vehicles. Maruti off late has got very aggressive where it is
intends to commence True value stores at every dealer, which MMFSL eyes as
an opportunity. These are high yielding segments where the average yields are
about 23-24%. Therefore with the increase in the share of this segment in the
total disbursements we believe that this will improve the yields for the
company. The company is eyeing an AUM of `20 billion by FY13.
Going forward as well, we expect the car financing, CV financing (including
construction equipment financing) and refinance segment to be the major growth
drivers for MMFSL. Considering the robust growth witnessed by MMFSL in
disbursements, we expect the disbursements to register a 41% CAGR during FY10-
12.
Borrowing profile
The borrowing profile has also undergone a change in 3QFY11 as the share of
NCD in total borrowings declined while that of banks increased. MMFSL also has
resorted to short term borrowings during the quarter in the form of commercial
papers with the share of this source increasing from 8% in 2QFY11 to 11% during
3QFY11. However bank continues to be major source of borrowings for MMFSL.
Asset quality remains strong
The asset quality has witnessed significant improvement with the Gross NPAs
declining from 8.7% as on 3QFY10 to 5.6% as on 3QFY11 versus 5.8% as on
2QFY11. The Net NPAs has declined on a YoY from 2.3% as on 3QFY10 to 1.1%
as on 3QFY11. The management has indicated that the cash collections are
improving in the rural areas. Going forward as well the asset quality is expected to
improve. In line with the RBI directive, the company has created a one-time
provisioning of `2.8 billion on standard assets reflected as an exceptional item in
the profit and loss account.
Capital Adequacy
MMFSL has a capital adequacy ratio of 17.4% as on Dec 2010 against the
requirement of 12%. With robust growth being witnessed in business, the company
has indicated the need for capital for which they have already passed a resolution
for a QIP.
Net Interest Margins
With the general increase in the interest rates, the cost of funds increased, however
the company has increased its lending rates by 50 bps each in Nov and Dec 2010.
As a result the lending rates have gone up during the quarter, however the increase
in the cost of funds have not offset the increase in the lending rates. Therefore
margins have been under pressure. Going forward as well, we expect the net
interest margins to decline from 11.3% as on FY10 to 11.1% as on FY12.
Rural Housing
Rural housing finance arm of MMFSL reported net profits of `61 million during
the nine months ended Dec 2010. The loan book has expanded from `2,110 million
in 2QFY11 to `2577 million in 3QY11. Although the current AUM in the rural
housing finance business is a mere `1.7bn, the management intends to scale this
business to the size of `12 billion by FY13 and hope to achieve a scale of `60
billion by FY16. The average ticket size of loans in this segment is `0.2 million.
The asset quality is robust in this segment with zero NPA levels. Although the
contribution from this segment is insignificant at present, we believe that this
segment would be the next growth driver for the company. However we have not
factored any potential revenues from these segments in our future earnings
estimates.
Valuation and Recommendation
MMFSL reported strong growth in disbursements during the 3QFY11, which led to
a growth of 36% in net interest Income. Considering the traction witnessed in
disbursements we expect a 39% CAGR in disbursements during FY10-12. We
expect the net interest income to register a CAGR of 33% and net profits to register
a CAGR of 34% during FY10-12. We recommend “ACCUMULATE” on
Mahindra and Mahindra financial services ltd for a target price of `778.(Implying a
3x multiple to its book value of `259 for FY12).
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