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M&M Financial Services
Play on rural India; initiate with OUTPERFORM
We initiate coverage with OUTPERFORM and price
target of Rs900.
MMFSL is a leading vehicle financier in rural India with a
wide distribution network, strong origination and
collection skills, and strong parentage.
MMFSL offers exposure to rising rural incomes and
improving financial penetration in rural/semi-urban
areas.
We expect the strong growth momentum to sustain
backed by a buoyant rural economy, launch of new
products and new branches.
Profitable business model – A large distribution network
with rural penetration and evolved appraisal and credit
monitoring systems have given MMFSL a strong
competitive edge in serving the needs of its target
customers. High credit rating due to its strong parentage
and securitization keep borrowing costs low while the rural
centric operations and use of technology keep operating
expenses low.
Buoyant growth and earnings outlook – Over FY08-10,
earnings have grown 36% p.a. driven by improving rural
incomes and new branch additions. We expect the strong
growth to sustain with AUMs likely to grow by 30% p.a. over
FY11-13E and earnings likely to grow 27% p.a.
Upside from rural housing subsidiary – We see good
growth potential in the company’s new rural housing finance
subsidiary, which is likely to grow loans to Rs6bn by FY12E
and further to Rs12bn by FY13E. Contribution of home
loans to consolidated profits is likely to increase to 7% by
FY13E from 1% now.
Valuation – Our price target of Rs900 is based on 3.4x
FY12E P/BV. We have used sustainable RoE of 25%, cost
of equity of 13% and sustainable growth of 8%.
Risks – Reliance on parent company’s growth prospects,
regulatory amendments such as changes in priority sector
eligibility of MMFSL’s loan assignments, government
intervention such as agriculture debt amnesty and higherthan-
expected credit costs are key downside risks.
Valuation
Our price target of Rs900 is based on 3.4x P/BV. We have used sustainable RoE of 25%, cost of
equity of 13% and sustainable growth rate of 8%. Over the past five years, the stock has traded
at a high of 3.4x one year forward P/BV, average multiple of 1.7x and low multiple of 1x.
Most of the re-rating in the stock has happened over the past one year, as investors started
focussing on growth in rural India as an important investment theme. The company has posted
strong earnings growth for 9M FY11, improved its asset quality and diversified its product mix
thereby demonstrating that it is reducing its reliance on its parent to grow its loan book. Our price
target is higher than its historical average as we believe the strong financial performance of the
company is sustainable and asset quality is likely to remain sound through our forecast period.
We also added upside from the good financial performance of MMFSL’s rural housing subsidiary.
Our risk reward analysis discussed earlier in the report indicates more downside than upside
risks for the stock. We have benchmarked our target multiples for our bull and bear case price
targets to the high and low multiples for stocks. As most of the re-rating in MMFS is recent, the
average and low multiples do not fully reflect this re-rating. We believe the re-rating is sustainable
driven by buoyancy in the rural economy and MMFSL’s strong business model that can capitalize
on this rural growth.
We have explained the derivation of our price target in the below table and detailed our
underlying assumptions.
Company profile
Mahindra & Mahindra Financial Services Limited is a subsidiary of Mahindra & Mahindra. It
provides loans for utility vehicles, tractors and cars predominantly in rural and non-metro
geographies through its network of 537 branches. The company also operates subsidiaries
including rural housing finance and insurance broking.
Management team
Managing Director: Ramesh Iyer
Ramesh Iyer has been with MMFSL since inception in 2001, prior to which he worked with Ashok
Leyland Finance Limited. He is also a member of the core committee of Finance Industry
Development Council and is the Chairman of Banking & Finance Committee of Bombay Chamber
of Commerce & Industry. He is a commerce graduate and an MBA from Mumbai University
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
M&M Financial Services
Play on rural India; initiate with OUTPERFORM
We initiate coverage with OUTPERFORM and price
target of Rs900.
MMFSL is a leading vehicle financier in rural India with a
wide distribution network, strong origination and
collection skills, and strong parentage.
MMFSL offers exposure to rising rural incomes and
improving financial penetration in rural/semi-urban
areas.
We expect the strong growth momentum to sustain
backed by a buoyant rural economy, launch of new
products and new branches.
Profitable business model – A large distribution network
with rural penetration and evolved appraisal and credit
monitoring systems have given MMFSL a strong
competitive edge in serving the needs of its target
customers. High credit rating due to its strong parentage
and securitization keep borrowing costs low while the rural
centric operations and use of technology keep operating
expenses low.
Buoyant growth and earnings outlook – Over FY08-10,
earnings have grown 36% p.a. driven by improving rural
incomes and new branch additions. We expect the strong
growth to sustain with AUMs likely to grow by 30% p.a. over
FY11-13E and earnings likely to grow 27% p.a.
Upside from rural housing subsidiary – We see good
growth potential in the company’s new rural housing finance
subsidiary, which is likely to grow loans to Rs6bn by FY12E
and further to Rs12bn by FY13E. Contribution of home
loans to consolidated profits is likely to increase to 7% by
FY13E from 1% now.
Valuation – Our price target of Rs900 is based on 3.4x
FY12E P/BV. We have used sustainable RoE of 25%, cost
of equity of 13% and sustainable growth of 8%.
Risks – Reliance on parent company’s growth prospects,
regulatory amendments such as changes in priority sector
eligibility of MMFSL’s loan assignments, government
intervention such as agriculture debt amnesty and higherthan-
expected credit costs are key downside risks.
Valuation
Our price target of Rs900 is based on 3.4x P/BV. We have used sustainable RoE of 25%, cost of
equity of 13% and sustainable growth rate of 8%. Over the past five years, the stock has traded
at a high of 3.4x one year forward P/BV, average multiple of 1.7x and low multiple of 1x.
Most of the re-rating in the stock has happened over the past one year, as investors started
focussing on growth in rural India as an important investment theme. The company has posted
strong earnings growth for 9M FY11, improved its asset quality and diversified its product mix
thereby demonstrating that it is reducing its reliance on its parent to grow its loan book. Our price
target is higher than its historical average as we believe the strong financial performance of the
company is sustainable and asset quality is likely to remain sound through our forecast period.
We also added upside from the good financial performance of MMFSL’s rural housing subsidiary.
Our risk reward analysis discussed earlier in the report indicates more downside than upside
risks for the stock. We have benchmarked our target multiples for our bull and bear case price
targets to the high and low multiples for stocks. As most of the re-rating in MMFS is recent, the
average and low multiples do not fully reflect this re-rating. We believe the re-rating is sustainable
driven by buoyancy in the rural economy and MMFSL’s strong business model that can capitalize
on this rural growth.
We have explained the derivation of our price target in the below table and detailed our
underlying assumptions.
Company profile
Mahindra & Mahindra Financial Services Limited is a subsidiary of Mahindra & Mahindra. It
provides loans for utility vehicles, tractors and cars predominantly in rural and non-metro
geographies through its network of 537 branches. The company also operates subsidiaries
including rural housing finance and insurance broking.
Management team
Managing Director: Ramesh Iyer
Ramesh Iyer has been with MMFSL since inception in 2001, prior to which he worked with Ashok
Leyland Finance Limited. He is also a member of the core committee of Finance Industry
Development Council and is the Chairman of Banking & Finance Committee of Bombay Chamber
of Commerce & Industry. He is a commerce graduate and an MBA from Mumbai University
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