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Mahindra & Mahindra Financial (MMFS)
Banks/Financial Institutions
Keeping the faith. Mahindra Finance (MMFSL) reported yet another quarter of strong
growth. Loan book was up 54% yoy driving 27% growth in core earnings. PAT growth
was muted at 17% due to higher provisions and absence of securitization income.
Normal monsoons, strong earnings buoyancy in rural India and auto manufacturer’s
focus on rural markets will likely continue to drive strong traction at Mahindra Finance.
We tweak estimates; retain BUY with price target of Rs825.
Business traction strong
MMFSL reported PAT of Rs1.35 bn, up 17% yoy but 5% below estimates. Stronger-than-expected
loan growth and NIM were somewhat offset by higher operating expenses; consequently, core
earnings were up 27% yoy.
Strong loan growth. Mahindra Finance reported loan growth of 14% qoq and 54% yoy.
Disbursements were up 32% yoy. The company has not sold down/ securitized loans in last two
quarters, thereby boosting growth in loans on balance sheet; loans under management
increased by 42% yoy.
Monsoon improved in September. We believe that better monsoon has boosted business at
MMFSL. Trends in monsoon were weak in July (average cumulative deficit of 4% below normal)
and August (1% below normal); however, with the pick-up in September, monsoon was
cumulatively 2% above average levels.
New product lines drive superior growth. MMFSL’s growth has been strong across product
lines. Disbursements mix was broadly stable: tractors at 20% of total, UVs at 27% of total. The
company continued to finance about 9,000 Maruti cars in 2QFY12. The management has
highlighted that addition of new products over the last few quarters provided a further boost to
its growth.
Raising loan growth estimates for FY2012E. We are raising our loan growth estimates
to 44% for FY2012E from 26% earlier. In 2QFY12, qoq loan growth was strong at 14%
on the back of 12% qoq growth in 1QFY12—thus the company has already delivered
25% YTD loan growth even as we are yet to enter the busy season (2H). Our auto analyst
expects growth in UVs at 12.5% in FY2012E; Mahindra tractors will likely grow by 17%
yoy while domestic car sales will likely decline marginally. Higher growth in semi-urban
and rural areas and increasing product lines will drive faster growth at MMFSL. The
company has likely benefitted from auto manufacturers’ focus in rural India. Several
companies have provided interest rate subventions to push products sales. For instance, in
case of car finance, MMFSL has tied up with Tata and Hyundai though Maruti continues
to drive about 80% of its car finance volumes.
Margins decline yoy—in line with macro trends
MMFSL reported NIM (as per KS calculations) of 10.5% (our estimate was 10.7%), up from
10.1% in 1QFY12 but down from 12.5% in 2QFY11. Rise in lending rates has pulled down
NIM in 1HFY12 on a yoy basis. MMFSL has raised its lending rates for new loans by 1% in
June 2011; this has likely driven qoq improvement in NIM. We expect NIM to remain
under pressure in the current scenario and hence, we are revising down our NIM estimate
by 60-90 bps.
Operating expenses rise as well
MMFSL’s operating expenses increased by 27% yoy to Rs1.5 bn; operating expenses ratio
was stable at 3.9% to 4% qoq. We believe that MMFSL will resume focus on cost control if
demand moderates. Notably, in the last two years, the company has focused on high
growth—MMFSL opened 88 branches in FY2011 and is targeting 50 in FY2012E (25
branches till September 2011).
NPLs decline marginally qoq; seasonal trends on track
MMFSL’s credit cost was up 56% yoy to Rs523 mn—this includes standard asset provisions
of Rs50 mn. Gross NPL ratio was 4%, down from 4.6% in 1QFY12; net NPL ratio was stable
at 1%. We are modeling credit cost (including standard asset provisions) of 1.7% of average
assets in FY2013E on the back of 1.4% for FY2012E (1.3% in 2QFY12).
Regulatory clarity awaited, lower dependence on securitization is positive
RBI has set up a committee of bankers to review the priority-sector framework for the
banking system. The report of this committee and the final reports on the revised draft
securitization guidelines are awaited by NBFCs.
We believe that MMFS is well-placed to manage the transition due to its lower dependence
on loan securitization/ sell-down; securitization income and provision write-back were 13%
of PBT in FY2012E. We are not assuming any income on loan sell-down in our estimates.
Mahindra Finance will likely not be able to book upfront income on loan sell-down/
securitization if the current draft is finalized; we are not assuming any upfront income on
loan sell-down in our estimates.
Loan sell-down (bilateral transactions with banks akin a bank loan) will likely be replaced by
securitization (involves issuance of a debt instrument). The draft proposes a ‘pari passu’
sharing of losses in bilateral deals. We believe that it’s hence challenging to expect ‘AAA’
rating for the transaction. The structure for loan securitization (that involves senior and subordinate
tranches) can merit a high credit rating for the senior tranche due to the credit
support provided by the subordinate.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra Financial (MMFS)
Banks/Financial Institutions
Keeping the faith. Mahindra Finance (MMFSL) reported yet another quarter of strong
growth. Loan book was up 54% yoy driving 27% growth in core earnings. PAT growth
was muted at 17% due to higher provisions and absence of securitization income.
Normal monsoons, strong earnings buoyancy in rural India and auto manufacturer’s
focus on rural markets will likely continue to drive strong traction at Mahindra Finance.
We tweak estimates; retain BUY with price target of Rs825.
Business traction strong
MMFSL reported PAT of Rs1.35 bn, up 17% yoy but 5% below estimates. Stronger-than-expected
loan growth and NIM were somewhat offset by higher operating expenses; consequently, core
earnings were up 27% yoy.
Strong loan growth. Mahindra Finance reported loan growth of 14% qoq and 54% yoy.
Disbursements were up 32% yoy. The company has not sold down/ securitized loans in last two
quarters, thereby boosting growth in loans on balance sheet; loans under management
increased by 42% yoy.
Monsoon improved in September. We believe that better monsoon has boosted business at
MMFSL. Trends in monsoon were weak in July (average cumulative deficit of 4% below normal)
and August (1% below normal); however, with the pick-up in September, monsoon was
cumulatively 2% above average levels.
New product lines drive superior growth. MMFSL’s growth has been strong across product
lines. Disbursements mix was broadly stable: tractors at 20% of total, UVs at 27% of total. The
company continued to finance about 9,000 Maruti cars in 2QFY12. The management has
highlighted that addition of new products over the last few quarters provided a further boost to
its growth.
Raising loan growth estimates for FY2012E. We are raising our loan growth estimates
to 44% for FY2012E from 26% earlier. In 2QFY12, qoq loan growth was strong at 14%
on the back of 12% qoq growth in 1QFY12—thus the company has already delivered
25% YTD loan growth even as we are yet to enter the busy season (2H). Our auto analyst
expects growth in UVs at 12.5% in FY2012E; Mahindra tractors will likely grow by 17%
yoy while domestic car sales will likely decline marginally. Higher growth in semi-urban
and rural areas and increasing product lines will drive faster growth at MMFSL. The
company has likely benefitted from auto manufacturers’ focus in rural India. Several
companies have provided interest rate subventions to push products sales. For instance, in
case of car finance, MMFSL has tied up with Tata and Hyundai though Maruti continues
to drive about 80% of its car finance volumes.
Margins decline yoy—in line with macro trends
MMFSL reported NIM (as per KS calculations) of 10.5% (our estimate was 10.7%), up from
10.1% in 1QFY12 but down from 12.5% in 2QFY11. Rise in lending rates has pulled down
NIM in 1HFY12 on a yoy basis. MMFSL has raised its lending rates for new loans by 1% in
June 2011; this has likely driven qoq improvement in NIM. We expect NIM to remain
under pressure in the current scenario and hence, we are revising down our NIM estimate
by 60-90 bps.
Operating expenses rise as well
MMFSL’s operating expenses increased by 27% yoy to Rs1.5 bn; operating expenses ratio
was stable at 3.9% to 4% qoq. We believe that MMFSL will resume focus on cost control if
demand moderates. Notably, in the last two years, the company has focused on high
growth—MMFSL opened 88 branches in FY2011 and is targeting 50 in FY2012E (25
branches till September 2011).
NPLs decline marginally qoq; seasonal trends on track
MMFSL’s credit cost was up 56% yoy to Rs523 mn—this includes standard asset provisions
of Rs50 mn. Gross NPL ratio was 4%, down from 4.6% in 1QFY12; net NPL ratio was stable
at 1%. We are modeling credit cost (including standard asset provisions) of 1.7% of average
assets in FY2013E on the back of 1.4% for FY2012E (1.3% in 2QFY12).
Regulatory clarity awaited, lower dependence on securitization is positive
RBI has set up a committee of bankers to review the priority-sector framework for the
banking system. The report of this committee and the final reports on the revised draft
securitization guidelines are awaited by NBFCs.
We believe that MMFS is well-placed to manage the transition due to its lower dependence
on loan securitization/ sell-down; securitization income and provision write-back were 13%
of PBT in FY2012E. We are not assuming any income on loan sell-down in our estimates.
Mahindra Finance will likely not be able to book upfront income on loan sell-down/
securitization if the current draft is finalized; we are not assuming any upfront income on
loan sell-down in our estimates.
Loan sell-down (bilateral transactions with banks akin a bank loan) will likely be replaced by
securitization (involves issuance of a debt instrument). The draft proposes a ‘pari passu’
sharing of losses in bilateral deals. We believe that it’s hence challenging to expect ‘AAA’
rating for the transaction. The structure for loan securitization (that involves senior and subordinate
tranches) can merit a high credit rating for the senior tranche due to the credit
support provided by the subordinate.
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