Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra Financial (MMFS)
Banks/Financial Institutions
Busine ss on track, reinitiate with ADD. We expect Mahindra Finance to sustain
business growth on the back of the economic growth in rural India. A rise in
borrowings cost and liquidity pressures in the system pose risks to margins. Conversely,
limited competition on the asset side, financial flexibility and parentage of M&M
provide comfort. We reinitiate coverage on the stock with a price target of Rs800. ADD.
We reinitiate coverage with ADD rating
After the recent QIP, we reinitiate coverage on Mahindra Finance (MMFSL) with an ADD rating and
price target of Rs800. At our price target, MMFSL will trade at 13X PER and 2.7X PBR FY2012E.
We expect MMFSL to deliver 23% earnings CAGR and about 23% medium-term RoE on the back
of 25% loan book CAGR and somewhat lower NIM. Limited competition faced by MMFSL will
help the company pass on the rise in borrowings cost though it would be imperative for the
underlying demand to sustain to absorb interest rate hikes.
Underlying economy strong, drives loan demand
MMFSL has reported 45% loan growth in 3QFY11 as compared to 22% in FY2010 and 3% in
FY2009. Growth in farm and non-farm income has likely driven growth for the company.
We do not yet find any significant signs of demand slowdown in rural India. We expect business
traction to remain good in the medium term; we are modeling 27% and 22% loan growth in
FY2012E and FY2013E, respectively. We see a strong winter crop and inflation in prices of agricommodities
boosting rural incomes. Rural economy continues to have strong linkages with the
monsoon but the strong traction of recent times provides comfort.
Non-farm activities have gained traction over past few quarters, thereby reducing the
dependence on monsoon and in turn risk to volatility in earnings. Traction of such activities
(NREGA, infrastructure development etc) needs to sustain in order to supplement farm income.
Downside risk to NIM
A rising rate environment and deficit liquidity in the system has clearly put pressure on borrowing
costs for MMFSL. The company has already raised lending rates twice in the past two months to
pass-on the rise in borrowings cost.
About 78% of its borrowings carry a fixed rate as against 100% loan assets (auto loans
don’t have interest reset clause). A rising rate environment puts pressure on margins as the
hike in borrowings cost can be made good only by raising lending rates for new customers.
MMFSL has already raised lending rates for new customers by 1% in the past two months.
We are modeling a decline in spreads by 25 bps; NIM will be largely stable due to the recent
capital issuance.
MMFSL faces limited competition from banks and other NBFCs on the asset side. Hence, it is
relatively better placed to pass-on a rise in lending rates to its customers. Nevertheless, rate
hikes pose the risk of tempering demand. The management expects auto manufacturers to
step in at in the initial phase and provide subvention in order to hold up demand.
Asset quality: In fine fettle
MMFSL’s credit cost was down 30% yoy in 9MFY11 on the back of improvement in
collection efficiency and recovery from written-off loans despite making provisions of Rs285
mn on standard assets. Gross NPL ratio declined to 5.6% in December 2010 from 8.7% in
December 2009. A buoyant rural economy has helped the company to improve collection
efficiency. A higher share of non-farm income is structurally positive for the business as
lower income volatility/ visibility on income reduces delinquencies. We are modeling credit
cost of 1.7% and 1.9% of average assets in FY2012E and FY2013E from 1.5% in FY2011E
as comported average ratio of 2.7% for the past seven years and peak of 3.9% in FY2009.
Housing finance not factored in our estimates
We have not factored the business of Mahindra Rural Finance in our estimates. The business
is currently small (loan book of Rs2.5 bn) but growing at a fast pace--disbursements of
Rs900 mn in 9MFY11. The company expects the housing finance business to be as large as
the auto finance book in next 3-4 years. Long tenure of home loans as compared to auto
loans will likely drive faster loan accretion.
Regulatory developments crucial
RBI has announced several regulatory changes for NBFCs in the past few weeks--standard
asset provisions on 0.25%, raising minimum capital adequacy ratio (CAR) of 15% from 12%
The standard asset provisions had one-time impact on MMFSL’s 3QFY11.
MMFSL had CAR of 17% (13% Tier I) as of December 2010 and about 20% (17% Tier I)
post QIP. The company has a policy to maintain 15% + CAR and hence the guidelines do
not have any significant impact on its business.
Nevertheless, further regulatory changes (in the areas of securitization, provisioning etc)
can pose risk to earnings. Notably, RBI has disallowed classification of gold loans
purchased from NBFCs to be considered as agricultural loans in the priority sector. In case
this is extended to auto loans originated by NBFCs, MMFSL’s borrowings cost will move
up.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra Financial (MMFS)
Banks/Financial Institutions
Busine ss on track, reinitiate with ADD. We expect Mahindra Finance to sustain
business growth on the back of the economic growth in rural India. A rise in
borrowings cost and liquidity pressures in the system pose risks to margins. Conversely,
limited competition on the asset side, financial flexibility and parentage of M&M
provide comfort. We reinitiate coverage on the stock with a price target of Rs800. ADD.
We reinitiate coverage with ADD rating
After the recent QIP, we reinitiate coverage on Mahindra Finance (MMFSL) with an ADD rating and
price target of Rs800. At our price target, MMFSL will trade at 13X PER and 2.7X PBR FY2012E.
We expect MMFSL to deliver 23% earnings CAGR and about 23% medium-term RoE on the back
of 25% loan book CAGR and somewhat lower NIM. Limited competition faced by MMFSL will
help the company pass on the rise in borrowings cost though it would be imperative for the
underlying demand to sustain to absorb interest rate hikes.
Underlying economy strong, drives loan demand
MMFSL has reported 45% loan growth in 3QFY11 as compared to 22% in FY2010 and 3% in
FY2009. Growth in farm and non-farm income has likely driven growth for the company.
We do not yet find any significant signs of demand slowdown in rural India. We expect business
traction to remain good in the medium term; we are modeling 27% and 22% loan growth in
FY2012E and FY2013E, respectively. We see a strong winter crop and inflation in prices of agricommodities
boosting rural incomes. Rural economy continues to have strong linkages with the
monsoon but the strong traction of recent times provides comfort.
Non-farm activities have gained traction over past few quarters, thereby reducing the
dependence on monsoon and in turn risk to volatility in earnings. Traction of such activities
(NREGA, infrastructure development etc) needs to sustain in order to supplement farm income.
Downside risk to NIM
A rising rate environment and deficit liquidity in the system has clearly put pressure on borrowing
costs for MMFSL. The company has already raised lending rates twice in the past two months to
pass-on the rise in borrowings cost.
About 78% of its borrowings carry a fixed rate as against 100% loan assets (auto loans
don’t have interest reset clause). A rising rate environment puts pressure on margins as the
hike in borrowings cost can be made good only by raising lending rates for new customers.
MMFSL has already raised lending rates for new customers by 1% in the past two months.
We are modeling a decline in spreads by 25 bps; NIM will be largely stable due to the recent
capital issuance.
MMFSL faces limited competition from banks and other NBFCs on the asset side. Hence, it is
relatively better placed to pass-on a rise in lending rates to its customers. Nevertheless, rate
hikes pose the risk of tempering demand. The management expects auto manufacturers to
step in at in the initial phase and provide subvention in order to hold up demand.
Asset quality: In fine fettle
MMFSL’s credit cost was down 30% yoy in 9MFY11 on the back of improvement in
collection efficiency and recovery from written-off loans despite making provisions of Rs285
mn on standard assets. Gross NPL ratio declined to 5.6% in December 2010 from 8.7% in
December 2009. A buoyant rural economy has helped the company to improve collection
efficiency. A higher share of non-farm income is structurally positive for the business as
lower income volatility/ visibility on income reduces delinquencies. We are modeling credit
cost of 1.7% and 1.9% of average assets in FY2012E and FY2013E from 1.5% in FY2011E
as comported average ratio of 2.7% for the past seven years and peak of 3.9% in FY2009.
Housing finance not factored in our estimates
We have not factored the business of Mahindra Rural Finance in our estimates. The business
is currently small (loan book of Rs2.5 bn) but growing at a fast pace--disbursements of
Rs900 mn in 9MFY11. The company expects the housing finance business to be as large as
the auto finance book in next 3-4 years. Long tenure of home loans as compared to auto
loans will likely drive faster loan accretion.
Regulatory developments crucial
RBI has announced several regulatory changes for NBFCs in the past few weeks--standard
asset provisions on 0.25%, raising minimum capital adequacy ratio (CAR) of 15% from 12%
The standard asset provisions had one-time impact on MMFSL’s 3QFY11.
MMFSL had CAR of 17% (13% Tier I) as of December 2010 and about 20% (17% Tier I)
post QIP. The company has a policy to maintain 15% + CAR and hence the guidelines do
not have any significant impact on its business.
Nevertheless, further regulatory changes (in the areas of securitization, provisioning etc)
can pose risk to earnings. Notably, RBI has disallowed classification of gold loans
purchased from NBFCs to be considered as agricultural loans in the priority sector. In case
this is extended to auto loans originated by NBFCs, MMFSL’s borrowings cost will move
up.
No comments:
Post a Comment