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Mahindra & Mahindra Financial (MMFS)
Banks/Financial Institutions
Core earnings on track, lower loan sell-down income pulls down PAT. Mahindra
Finance (MMFSL) reported core PBT of Rs2.3 bn, up 33% yoy—in line with estimates.
Loan growth continued to accelerate to 51% yoy, NIM moved up qoq (a seasonal
phenomenon) and were broadly in line with estimates. Lower-than-expected income
from loan securitization (down 66% yoy) likely due to lower upfront income recognition
pulled down reported earnings—4QFY11 PAT was up 11% yoy. We tweak our
estimates, roll over price target to Rs925 (based on FY2013E) and retain ADD
Growth continues to accelerate
MMFSL has reported 51% loan growth in 4QFY11, up from 38% in 3QFY11, 22% in FY2010 and
3% in FY2009. Buoyancy in rural India on the back of growth in farm and non-farm income has
likely accelerated growth for the company.
We expect the business traction to remain good in the medium term; we are modeling 27% and
21% loan growth in FY2012E and FY2013E, respectively. Rural economy continues to have strong
linkages with monsoon and business momentum for MMFSL typically picks up in 2H, i.e. post
monsoon. While we do not have clarity on the monsoon trends for FY2012E, the strong earnings
momentum of FY2011 provides comfort.
Our auto analyst expects growth in UVs and cars to moderate to 10-15% in FY2012E. We expect
semi-urban and rural areas to continue to grow faster than industry due to aforesaid factors.
MMFSL faces limited competition from banks and other NBFCs. Hence, it’s relatively better-placed
to pass on rise in lending rates to its customers. Nevertheless, rate hike poses risk of tapering
demand. Management expects auto manufacturers to step in at in the initial phase and provide
subvention in order to hold up demand.
Margins move up qoq, we model compression in FY2012E
MMFSL report NIM (as per KS calculations) of 12.7% as compared to 12.1% in 3QFY11 and
12.8% estimated by us. Typically, NIMs move up in 4Q as loan recoveries improve. Since the
traction in collections was strong throughout the past four quarters, the qoq swing in margins was
less severe than observed in previous years—NIM improved to 14.4% in 4QFY10 from 11-11.5%
in 9MFY10.
Borrowing cost under pressure
A rising rate environment and deficit liquidity in the system have clearly put pressure on
borrowing cost of MMFSL. About 14% of MMFSL’s borrowings have a floating rate even as
its entire loan book carries a fixed rate. The company has already raised lending rates twice
in the last quarter (aggregate of 1%) to pass on the rise in borrowings cost. We are
modeling NIM of 11.7-11.9% for FY2012E and FY2013E to factor increase in marginal
borrowings cost in the past few months.
Operating expenses rise as well
MMFSL’s operating expenses ratio increased to 37% during 4QFY11 from 31% in FY2010.
In order to support its growth, MMFSL has recruited about 2,000 employees in its subsidiary
company which will outsource its services to the parent. In light of high growth in business,
we continue to model 34-36% operating expenses ratio over the next few quarters.
Management expects the ratio to moderate down to about 30%—a likely upside to our
estimates.
Asset quality performance improves further
MMFSL’s credit cost was down 57% yoy and 47% qoq below estimates, clearly indicating
strong underlying buoyancy in the rural economy and management’s efforts on recoveries.
Gross NPL ratio declined to 4% from 6.4% in 4QFY10 and 5.6% in 3QFY11. The gross NPLs
reduced to Rs5.5 bn from Rs6.1 bn in 4QFY10. Net NPL ratio is now down to 0.6% from
0.9% 4QFY10.
Despite making provisions of 0.25% on all standard assets in FY2011, the ratio of credit
losses to average assets declined to 1.4% from 2.7% in FY2010 and 3.9% in FY2009.
We are modeling credit cost ratio of 1.7-1.8% for the next two years.
Income from loan sell-down lower, deferred collection charges to make up
MMFSL reported 66% yoy decline in income from loan sell-down. The net yield on loan selldown
declined to 3% from 11% in 4QFY10. According to the management, the company
has sold down loans at the base rate in the past two quarters as compared to low rates of
the past. The company will recover significant part of the reduction in yield in the form of
deferred collection charges in subsequent years.
Tweaking estimates, retain ADD
We are tweaking our earnings estimates by 1-2% for FY2012E-13E. We are raising our price
target to Rs925 (based on FY2013E) from Rs800 earlier. At our price target, MMFSL will
trade at 14.9X and 13X PER and 3.2X and 2.7X PBR FY2012E and FY2013E, respectively for
medium-term RoE of 23-24%. MMFSL remains in a sweet spot due to the underlying
traction in the rural economy. As such, we believe that the company is well-placed to
achieve 25% loan growth in FY2012E—normal monsoon and strong prices in agri
commodities can provide further boost. Higher-than-expected rise in borrowings costs
remains a risk for all bulk borrowers and NBFCs.
We have not factored the business of Mahindra Rural Finance in our estimates. The business
is currently small (loan book of Rs2.1 bn) but growing at a fast pace—disbursements of Rs90
mn in FY2010. PAT from this business increased to Rs89 mn in FY2011 from Rs22 mn in
FY2010.The company expects the housing finance business to be as large as the auto
finance book in the next 3-4 years. Long tenure of home loans as compared to auto loans
will likely drive faster loan accretion.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra Financial (MMFS)
Banks/Financial Institutions
Core earnings on track, lower loan sell-down income pulls down PAT. Mahindra
Finance (MMFSL) reported core PBT of Rs2.3 bn, up 33% yoy—in line with estimates.
Loan growth continued to accelerate to 51% yoy, NIM moved up qoq (a seasonal
phenomenon) and were broadly in line with estimates. Lower-than-expected income
from loan securitization (down 66% yoy) likely due to lower upfront income recognition
pulled down reported earnings—4QFY11 PAT was up 11% yoy. We tweak our
estimates, roll over price target to Rs925 (based on FY2013E) and retain ADD
Growth continues to accelerate
MMFSL has reported 51% loan growth in 4QFY11, up from 38% in 3QFY11, 22% in FY2010 and
3% in FY2009. Buoyancy in rural India on the back of growth in farm and non-farm income has
likely accelerated growth for the company.
We expect the business traction to remain good in the medium term; we are modeling 27% and
21% loan growth in FY2012E and FY2013E, respectively. Rural economy continues to have strong
linkages with monsoon and business momentum for MMFSL typically picks up in 2H, i.e. post
monsoon. While we do not have clarity on the monsoon trends for FY2012E, the strong earnings
momentum of FY2011 provides comfort.
Our auto analyst expects growth in UVs and cars to moderate to 10-15% in FY2012E. We expect
semi-urban and rural areas to continue to grow faster than industry due to aforesaid factors.
MMFSL faces limited competition from banks and other NBFCs. Hence, it’s relatively better-placed
to pass on rise in lending rates to its customers. Nevertheless, rate hike poses risk of tapering
demand. Management expects auto manufacturers to step in at in the initial phase and provide
subvention in order to hold up demand.
Margins move up qoq, we model compression in FY2012E
MMFSL report NIM (as per KS calculations) of 12.7% as compared to 12.1% in 3QFY11 and
12.8% estimated by us. Typically, NIMs move up in 4Q as loan recoveries improve. Since the
traction in collections was strong throughout the past four quarters, the qoq swing in margins was
less severe than observed in previous years—NIM improved to 14.4% in 4QFY10 from 11-11.5%
in 9MFY10.
Borrowing cost under pressure
A rising rate environment and deficit liquidity in the system have clearly put pressure on
borrowing cost of MMFSL. About 14% of MMFSL’s borrowings have a floating rate even as
its entire loan book carries a fixed rate. The company has already raised lending rates twice
in the last quarter (aggregate of 1%) to pass on the rise in borrowings cost. We are
modeling NIM of 11.7-11.9% for FY2012E and FY2013E to factor increase in marginal
borrowings cost in the past few months.
Operating expenses rise as well
MMFSL’s operating expenses ratio increased to 37% during 4QFY11 from 31% in FY2010.
In order to support its growth, MMFSL has recruited about 2,000 employees in its subsidiary
company which will outsource its services to the parent. In light of high growth in business,
we continue to model 34-36% operating expenses ratio over the next few quarters.
Management expects the ratio to moderate down to about 30%—a likely upside to our
estimates.
Asset quality performance improves further
MMFSL’s credit cost was down 57% yoy and 47% qoq below estimates, clearly indicating
strong underlying buoyancy in the rural economy and management’s efforts on recoveries.
Gross NPL ratio declined to 4% from 6.4% in 4QFY10 and 5.6% in 3QFY11. The gross NPLs
reduced to Rs5.5 bn from Rs6.1 bn in 4QFY10. Net NPL ratio is now down to 0.6% from
0.9% 4QFY10.
Despite making provisions of 0.25% on all standard assets in FY2011, the ratio of credit
losses to average assets declined to 1.4% from 2.7% in FY2010 and 3.9% in FY2009.
We are modeling credit cost ratio of 1.7-1.8% for the next two years.
Income from loan sell-down lower, deferred collection charges to make up
MMFSL reported 66% yoy decline in income from loan sell-down. The net yield on loan selldown
declined to 3% from 11% in 4QFY10. According to the management, the company
has sold down loans at the base rate in the past two quarters as compared to low rates of
the past. The company will recover significant part of the reduction in yield in the form of
deferred collection charges in subsequent years.
Tweaking estimates, retain ADD
We are tweaking our earnings estimates by 1-2% for FY2012E-13E. We are raising our price
target to Rs925 (based on FY2013E) from Rs800 earlier. At our price target, MMFSL will
trade at 14.9X and 13X PER and 3.2X and 2.7X PBR FY2012E and FY2013E, respectively for
medium-term RoE of 23-24%. MMFSL remains in a sweet spot due to the underlying
traction in the rural economy. As such, we believe that the company is well-placed to
achieve 25% loan growth in FY2012E—normal monsoon and strong prices in agri
commodities can provide further boost. Higher-than-expected rise in borrowings costs
remains a risk for all bulk borrowers and NBFCs.
We have not factored the business of Mahindra Rural Finance in our estimates. The business
is currently small (loan book of Rs2.1 bn) but growing at a fast pace—disbursements of Rs90
mn in FY2010. PAT from this business increased to Rs89 mn in FY2011 from Rs22 mn in
FY2010.The company expects the housing finance business to be as large as the auto
finance book in the next 3-4 years. Long tenure of home loans as compared to auto loans
will likely drive faster loan accretion.
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