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Mahindra And Mahindra Financial Services
(MMFS.BO)
4Q11 Results: Strong Quarter, Business Momentum Continues
Healthy earnings with 4Q11 profits up 15%YoY — Mahindra Finance's 4Q11 profits
were strong; up 15%YoY and well ahead of CIRA estimates. Key drivers were strong
loan growth, coupled with higher margins and improving asset quality trends. Credit
costs were also down sharply and provided meaningful support to profitability. Overall,
it was a well managed quarter with elevated loan growth being supported by high net
interest margins and healthy asset quality.
P&L: NIMs improvement a key positive — Mahindra Finance's earnings improved
due to: a) Sharp NIMs increase despite a challenging funding environment –
management seemed confident of protecting margins ahead; b) While fee income
remains very small, it will be a key focus area going forward; c) Operating expenses
were largely in-line with asset growth and the cost to income ratio is expected to
stabilize at current levels; d) Credit costs were down meaningfully and are at their
historical best (0.5% annualized in 4Q11). There is some seasonality at play and we
expect these to increase over the next two quarters.
Balance sheet: Getting diversified and de-risked — Mahindra Finance's loan growth
was strong (49%YoY) and more broad-based than before. There was product
diversification with a healthier balance across segments now. The growth has also
been de-risked with a shift in customer profile from being farm dependent to a more
professional end use. The funding mix remains wholesale; though the asset-liability
mismatch has been managed well, with an increase in fixed liability proportion to
~80%. Asset quality has improved meaningfully, partly supported by a buoyant macro
environment.
Good quarter but priced in — The business has strong momentum with good growth
and profitability. However, its outperformance versus the Sensex by 84% over the last
12months factors this in. We expect the valuations to be capped at current levels, and
thus maintain Sell.
Mahindra And Mahindra Financial Services
Company description
Mahindra Finance is amongst India's leading non-bank finance companies, with a
strong presence in vehicle financing businesses, especially in rural parts of the
country. The company is primarily engaged in lending against cars, tractors,
utility/commercial vehicles and has also recently started a housing finance
subsidiary (Mahindra Rural Housing Finance Ltd, MRHFL). It has a separate
insurance broking subsidiary, Mahindra Insurance Brokers Ltd (MIBL), for
distribution of insurance products. It has built a wide distribution network across the
country with 524 branches and over 9,000 employees. It is strongly positioned in the
semi-urban and rural areas of the country where it has a substantial majority of its
branches, and is likely to be a prime beneficiary of strong rural growth prospects
over the longer term.
Investment strategy
We rate Mahindra Finance shares Sell / Medium Risk. Mahindra Finance is a
leading organized player in the new vehicle financing segment in India. We believe
Mahindra Finance has a differentiated business model, with healthy growth and
strong return profile. However, our Sell (3M) recommendation is based on: a)
Relatively high valuations - currently trading at 2.6x FY12E P/BV leaving little room
for further upsides; b) Loan growth levels remain strong, but may slow cyclically on
a high base effect following the sharp run-up in FY11 industry growth (from 46% in
FY11E to 25% CAGR in FY12-13E), while absolute growth should remain healthy,
offset by easing industry growth and a high base effect; and c) Some pressure on
net interest margins - currently quite high (12%+), but higher cost of funding is likely
to start weighing on net interest margins for wholesale funded institutions.
Valuation
We value Mahindra Finance at Rs760 per share based on our EVA model, which
captures the long-term value of the business and is a standard valuation measure
for the CIRA India banking coverage. Our EVA model assumes: a) a risk-free rate of
8% (in-line with the current secondary market yields); b) longer-term loan loss
provisions of 200bps given the company's higher asset risk profile; and c) loan
spreads of 850bps due to its higher-yielding asset profile. Our target price is also
benchmarked off a 2.5x 1yr Fwd (FY12E) P/BV, which is at the mid-point of our
target multiples for private sector banks (1.5x-3.5x) and at the higher end of its own
historical multiples (average 1yr Fwd P/BV over the previous cycle was 1.7x).
Mahindra Finance trades at +2 SD above its historical mean; we believe its
valuations leave little upside given the current high interest rates, rising cost of
funds and slower-than-expected loan growth levels.
Risks
We rate Mahindra Finance shares Medium Risk, in line with our quantitative riskrating
system, which tracks 260-day historical share price volatility. We believe
Mahindra Finance's large capital base, strong growth and high return profile
moderates its risk profile. Key upside risks that can cause the stock to trade above
our target price include: a) Higher than expected market share and loan growth; b)
Continued improvements in asset quality; c) Easy liquidity and low interest
environment and d) Regulatory changes.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra And Mahindra Financial Services
(MMFS.BO)
4Q11 Results: Strong Quarter, Business Momentum Continues
Healthy earnings with 4Q11 profits up 15%YoY — Mahindra Finance's 4Q11 profits
were strong; up 15%YoY and well ahead of CIRA estimates. Key drivers were strong
loan growth, coupled with higher margins and improving asset quality trends. Credit
costs were also down sharply and provided meaningful support to profitability. Overall,
it was a well managed quarter with elevated loan growth being supported by high net
interest margins and healthy asset quality.
P&L: NIMs improvement a key positive — Mahindra Finance's earnings improved
due to: a) Sharp NIMs increase despite a challenging funding environment –
management seemed confident of protecting margins ahead; b) While fee income
remains very small, it will be a key focus area going forward; c) Operating expenses
were largely in-line with asset growth and the cost to income ratio is expected to
stabilize at current levels; d) Credit costs were down meaningfully and are at their
historical best (0.5% annualized in 4Q11). There is some seasonality at play and we
expect these to increase over the next two quarters.
Balance sheet: Getting diversified and de-risked — Mahindra Finance's loan growth
was strong (49%YoY) and more broad-based than before. There was product
diversification with a healthier balance across segments now. The growth has also
been de-risked with a shift in customer profile from being farm dependent to a more
professional end use. The funding mix remains wholesale; though the asset-liability
mismatch has been managed well, with an increase in fixed liability proportion to
~80%. Asset quality has improved meaningfully, partly supported by a buoyant macro
environment.
Good quarter but priced in — The business has strong momentum with good growth
and profitability. However, its outperformance versus the Sensex by 84% over the last
12months factors this in. We expect the valuations to be capped at current levels, and
thus maintain Sell.
Mahindra And Mahindra Financial Services
Company description
Mahindra Finance is amongst India's leading non-bank finance companies, with a
strong presence in vehicle financing businesses, especially in rural parts of the
country. The company is primarily engaged in lending against cars, tractors,
utility/commercial vehicles and has also recently started a housing finance
subsidiary (Mahindra Rural Housing Finance Ltd, MRHFL). It has a separate
insurance broking subsidiary, Mahindra Insurance Brokers Ltd (MIBL), for
distribution of insurance products. It has built a wide distribution network across the
country with 524 branches and over 9,000 employees. It is strongly positioned in the
semi-urban and rural areas of the country where it has a substantial majority of its
branches, and is likely to be a prime beneficiary of strong rural growth prospects
over the longer term.
Investment strategy
We rate Mahindra Finance shares Sell / Medium Risk. Mahindra Finance is a
leading organized player in the new vehicle financing segment in India. We believe
Mahindra Finance has a differentiated business model, with healthy growth and
strong return profile. However, our Sell (3M) recommendation is based on: a)
Relatively high valuations - currently trading at 2.6x FY12E P/BV leaving little room
for further upsides; b) Loan growth levels remain strong, but may slow cyclically on
a high base effect following the sharp run-up in FY11 industry growth (from 46% in
FY11E to 25% CAGR in FY12-13E), while absolute growth should remain healthy,
offset by easing industry growth and a high base effect; and c) Some pressure on
net interest margins - currently quite high (12%+), but higher cost of funding is likely
to start weighing on net interest margins for wholesale funded institutions.
Valuation
We value Mahindra Finance at Rs760 per share based on our EVA model, which
captures the long-term value of the business and is a standard valuation measure
for the CIRA India banking coverage. Our EVA model assumes: a) a risk-free rate of
8% (in-line with the current secondary market yields); b) longer-term loan loss
provisions of 200bps given the company's higher asset risk profile; and c) loan
spreads of 850bps due to its higher-yielding asset profile. Our target price is also
benchmarked off a 2.5x 1yr Fwd (FY12E) P/BV, which is at the mid-point of our
target multiples for private sector banks (1.5x-3.5x) and at the higher end of its own
historical multiples (average 1yr Fwd P/BV over the previous cycle was 1.7x).
Mahindra Finance trades at +2 SD above its historical mean; we believe its
valuations leave little upside given the current high interest rates, rising cost of
funds and slower-than-expected loan growth levels.
Risks
We rate Mahindra Finance shares Medium Risk, in line with our quantitative riskrating
system, which tracks 260-day historical share price volatility. We believe
Mahindra Finance's large capital base, strong growth and high return profile
moderates its risk profile. Key upside risks that can cause the stock to trade above
our target price include: a) Higher than expected market share and loan growth; b)
Continued improvements in asset quality; c) Easy liquidity and low interest
environment and d) Regulatory changes.
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