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Mahindra & Mahindra Fin.
Services
The best is behind us
Initiating with an Underperform and a TP of Rs525 – 15%
potential downside
We initiate coverage of MMFS with an Underperform rating and a TP of Rs525.
We believe the slowing growth, margin compression and regulatory overhang
will impact valuations adversely for the stock. Our earnings are 4 to 13% below
Bloomberg consensus for FY12E and FY13E, respectively.
Major segments headed for a slowdown
We believe loan growth should slow to 20% in FY12E from 43% in FY11. Key
segments like Mahindra utility vehicles, tractors and car sales should slow driven
by higher interest rates, incrementally tougher competition and fuel price hikes.
Margins likely to take a hit
NIMs should compress 30bps in FY12 to 10.7% due to a variety of reasons.
MMFS, being a wholesale funded franchise, is likely to face significant pressures
from cost of funds side where wholesale borrowing costs continue to be high. On
the pricing side, the company should feel the pinch of higher competition as
banks and other NBFCs also target the same semi-urban and rural client base.
Another headwind could be lower securitisation volumes if tractor lending is
taken out from priority sector lending for banks or more likely greater oversight
and auditing is done of loan securitisation deals.
Asset quality – credit costs should increase
MMFS has enjoyed a benign asset quality environment with credit costs going
down from a peak of 420bps in FY09 to 150bps in FY11. Significant drivers of
improved asset quality have been the healthy growth in rural income levels and
good demand even for recovered vehicles as well as better underwriting
standard of the company. However, we believe credit costs have likely bottomed
out and going forward should be a drag on the earnings. We do not expect a
sharp reversal of asset quality cycle but do believe that credit costs have likely
bottomed out and should go up to ~170bps in FY12E.
Regulations remain an overhang
Two key points here: 1) The core portfolio securitised (or more accurately
assigned) by MMFSL – ie, tractor loans are unlikely to be taken out of priority
sector category by RBI. However, banks will be much more cautious and
thorough in their auditing of the portfolio. This might lower the actual volumes of
securitisation done. For 20% reduction in securitisation, cost of funds goes up by
6bps and CAR lower by 22bps. 2) Credit enhancement for assignment may be
required by regulations to be deducted from the capital base that can lower tier I
by 150bps and CAR by 350bps.
Valuations- Multiples should compress
Valuations are still rich at 1.8x FY13E BVPS for a 20% FY13E ROE. Given the
headwinds – there is an 85% correlation between auto sales and MMFS stock
price, stock derating is likely to happen. Key risks to our thesis include margins
being maintained, no growth slowdown and no worsening of asset quality.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra Fin.
Services
The best is behind us
Initiating with an Underperform and a TP of Rs525 – 15%
potential downside
We initiate coverage of MMFS with an Underperform rating and a TP of Rs525.
We believe the slowing growth, margin compression and regulatory overhang
will impact valuations adversely for the stock. Our earnings are 4 to 13% below
Bloomberg consensus for FY12E and FY13E, respectively.
Major segments headed for a slowdown
We believe loan growth should slow to 20% in FY12E from 43% in FY11. Key
segments like Mahindra utility vehicles, tractors and car sales should slow driven
by higher interest rates, incrementally tougher competition and fuel price hikes.
Margins likely to take a hit
NIMs should compress 30bps in FY12 to 10.7% due to a variety of reasons.
MMFS, being a wholesale funded franchise, is likely to face significant pressures
from cost of funds side where wholesale borrowing costs continue to be high. On
the pricing side, the company should feel the pinch of higher competition as
banks and other NBFCs also target the same semi-urban and rural client base.
Another headwind could be lower securitisation volumes if tractor lending is
taken out from priority sector lending for banks or more likely greater oversight
and auditing is done of loan securitisation deals.
Asset quality – credit costs should increase
MMFS has enjoyed a benign asset quality environment with credit costs going
down from a peak of 420bps in FY09 to 150bps in FY11. Significant drivers of
improved asset quality have been the healthy growth in rural income levels and
good demand even for recovered vehicles as well as better underwriting
standard of the company. However, we believe credit costs have likely bottomed
out and going forward should be a drag on the earnings. We do not expect a
sharp reversal of asset quality cycle but do believe that credit costs have likely
bottomed out and should go up to ~170bps in FY12E.
Regulations remain an overhang
Two key points here: 1) The core portfolio securitised (or more accurately
assigned) by MMFSL – ie, tractor loans are unlikely to be taken out of priority
sector category by RBI. However, banks will be much more cautious and
thorough in their auditing of the portfolio. This might lower the actual volumes of
securitisation done. For 20% reduction in securitisation, cost of funds goes up by
6bps and CAR lower by 22bps. 2) Credit enhancement for assignment may be
required by regulations to be deducted from the capital base that can lower tier I
by 150bps and CAR by 350bps.
Valuations- Multiples should compress
Valuations are still rich at 1.8x FY13E BVPS for a 20% FY13E ROE. Given the
headwinds – there is an 85% correlation between auto sales and MMFS stock
price, stock derating is likely to happen. Key risks to our thesis include margins
being maintained, no growth slowdown and no worsening of asset quality.
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