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Mahindra & Mahindra Financial Services (MMFSL) reported 11.6% YoY growth in 4QFY11 PAT to Rs1.6b (3.3% below
our estimate). Rising interest rates led to lower securitization income, which in turn restricted PAT growth. On the
positive side, business growth remains strong, better ALM profile is leading to healthy spreads, and asset quality is
showing consistent improvement. Key highlights are:
Net income grew 16% YoY to Rs4.1b (v/s our estimate of Rs4.4b). Securitization income was Rs238m v/s Rs529m
a year ago despite MMFSL assigning a similar quantum of assets in 4QFY11 as in 4QFY10 (Rs4.7b).
Spread (calculated) increased ~50bp QoQ (declined 240bp YoY on lower securitization income), led by control on
cost of funds and hike in lending rates (50bp in 4QFY11).
AUM stood at Rs152b (up 41% YoY and 13% QoQ) in 4QFY11. Disbursements were Rs39.6b (Rs42.4b in 3QFY11)
- 33% towards cars, 29% towards three-wheelers/UVs, and 22% towards tractors.
MMFSL's asset quality has shown consistent improvement over the last 5-6 quarters. In percentage terms, GNPA
has reduced to 4% from 5.6% in 3QFY11. Similarly, NNPA has declined to 0.6% of total assets. Total credit cost
(provisions for NPAs and write-offs) for FY11 has declined to ~1.4% v/s 2.7% in FY10, contributing to profitability
improvement.
MMFSL has declared a dividend of Rs10 per share for FY11.
Valuation and view: We estimate EPS of Rs57 and BV of Rs286 for FY12, and EPS of Rs68.5 and BV of Rs338 for
FY13. We expect return ratios to remain strong, with RoA (on AUM) at ~3.5% and RoE at ~22%. MMFSL is well
positioned to sustain its qualitative growth momentum. However, premium valuations largely discount these aspects in
our view. We value the stock at 2.5x FY13E BV at Rs845, with limited upside potential. We downgrade our recommendation
from Buy to Neutral.
Net income growth impacted by lower securitization income: Net income grew
16% YoY to Rs4.1b (v/s our estimate of Rs4.4b). Securitization income was lower at
Rs238m v/s Rs529m in 4QFY10 despite MMFSL assigning a similar quantum of assets in
4QFY11 as in 4QFY10 (Rs4.7b). With banks buying portfolios at above base rate, cost of
assigning assets for companies like MMFSL has increased, leading to lower securitization
income. To offset this, starting from 3QFY11, MMFSL has entered into an arrangement
with banks to earn fee income for collection of assets assigned; however, this income
would be spread over the life of the assets. At the end of FY11, outstanding collection fees
receivable stood at ~Rs250m.
Spreads improved QoQ: Spreads improved ~50bp QoQ on a calculated basis (declined
240bp YoY on account of lower securitization income), led by control on cost of funds and
hike in lending rates (50bp in 4QFY11). MMFSL has well-matched asset-liability duration.
Average duration of assets is ~26 months while average duration of liabilities is ~28 months.
100% of fixed rate assets are matched with 85% of fixed rate borrowings.
Strong business growth: AUM stood at Rs152b (up 41% YoY and 13% QoQ) in 4QFY11.
Of this, 31% exposure is to three-wheelers/UVs, 23% to tractors and 31% to cars.
Disbursements for the quarter were Rs39.6b (Rs42.4b in 3QFY11) - 33% towards cars,
29% towards three-wheelers/UVs and 22% towards tractors. Improving outlook for rural
India is leading to healthy business growth for MMFSL. Management expects growth to
moderate 25-30% in FY12 (on a high base of FY11).
Asset quality continues to show improvement: MMFSL's asset quality has shown
consistent improvement over the last 5-6 quarters. In percentage terms, GNPA has reduced
to 4% from 5.6% in 3QFY11. In value terms, GNPA has declined 23% QoQ to Rs5.4b.
Similarly, NNPA has also reduced to 0.6% of total assets during the quarter. Provision
coverage ratio has improved to ~86%, providing cushion to absorb any negative surprise
on asset quality. Total credit cost (provisions for NPAs and write-offs) for FY11 has
declined to ~1.4% from 2.7% in FY10, contributing to overall profitability improvement.
Management expects credit cost for FY12 to remain in the range of 1.5-1.7%. We have
modeled credit cost of 1.7% for FY12 and 1.9% for FY13.
Branch network expanding at desired pace, with focus on keeping CI ratio stable:
During the quarter, MMFSL added 10 new branches, taking the total to 547 as on 31
March 2011. It expects to add 30-40 branches in FY12. Cost-to-income (CI) ratio has
increased to 36.5% from 35% a quarter ago on the back of increase in employee costs (as
variable component of salary would have been accounted) and lower securitization income.
Adequately capitalized: MMFSL raised ~Rs4b through equity issuance during the quarter.
This has pushed up CAR as at 31 March 2011 to 20%, with tier-I capital of 17%. MMFSL
has declared a dividend of Rs10/share for FY11.
Valuation and view: MMFSL offers exposure to rising rural incomes and improving
financial penetration in rural/semi-urban areas. Improving outlook for rural India is leading
to healthy business growth for the company. Well-matched asset-liability duration and
rising proportion of fixed rate liabilities augur well for spreads. The company actively uses
loan assignment/securitization as a source of funding due to the capital it frees up and the
lower cost of borrowing it offers by virtue of its priority sector status. In case of any
regulatory change in respect of capital requirements on off-balance sheet items and priority
status eligibility change, MMFSL's cost of funds will rise. However, with off-books portfolio
of 15-20%, the impact would be comparatively lower. MMFSL has done well to contain
additions to NPAs, and with coverage ratio of 85%+, it is in a position to absorb any shock
on asset quality.
We estimate EPS of Rs57 and BV of Rs286 for FY12, and EPS of Rs68.5 and BV of
Rs338 for FY13. We expect return ratios to remain strong, with RoA (on AUM) at ~3.5%
and RoE at ~22%. The stock trades at 2.3x FY13E BV. MMFSL is well positioned to
sustain its qualitative growth momentum. However, premium valuations largely discount
these aspects in our view. We value the stock at 2.5x FY13E BV at Rs845, with limited
upside potential. We downgrade our recommendation from Buy to Neutral.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra Financial Services (MMFSL) reported 11.6% YoY growth in 4QFY11 PAT to Rs1.6b (3.3% below
our estimate). Rising interest rates led to lower securitization income, which in turn restricted PAT growth. On the
positive side, business growth remains strong, better ALM profile is leading to healthy spreads, and asset quality is
showing consistent improvement. Key highlights are:
Net income grew 16% YoY to Rs4.1b (v/s our estimate of Rs4.4b). Securitization income was Rs238m v/s Rs529m
a year ago despite MMFSL assigning a similar quantum of assets in 4QFY11 as in 4QFY10 (Rs4.7b).
Spread (calculated) increased ~50bp QoQ (declined 240bp YoY on lower securitization income), led by control on
cost of funds and hike in lending rates (50bp in 4QFY11).
AUM stood at Rs152b (up 41% YoY and 13% QoQ) in 4QFY11. Disbursements were Rs39.6b (Rs42.4b in 3QFY11)
- 33% towards cars, 29% towards three-wheelers/UVs, and 22% towards tractors.
MMFSL's asset quality has shown consistent improvement over the last 5-6 quarters. In percentage terms, GNPA
has reduced to 4% from 5.6% in 3QFY11. Similarly, NNPA has declined to 0.6% of total assets. Total credit cost
(provisions for NPAs and write-offs) for FY11 has declined to ~1.4% v/s 2.7% in FY10, contributing to profitability
improvement.
MMFSL has declared a dividend of Rs10 per share for FY11.
Valuation and view: We estimate EPS of Rs57 and BV of Rs286 for FY12, and EPS of Rs68.5 and BV of Rs338 for
FY13. We expect return ratios to remain strong, with RoA (on AUM) at ~3.5% and RoE at ~22%. MMFSL is well
positioned to sustain its qualitative growth momentum. However, premium valuations largely discount these aspects in
our view. We value the stock at 2.5x FY13E BV at Rs845, with limited upside potential. We downgrade our recommendation
from Buy to Neutral.
Net income growth impacted by lower securitization income: Net income grew
16% YoY to Rs4.1b (v/s our estimate of Rs4.4b). Securitization income was lower at
Rs238m v/s Rs529m in 4QFY10 despite MMFSL assigning a similar quantum of assets in
4QFY11 as in 4QFY10 (Rs4.7b). With banks buying portfolios at above base rate, cost of
assigning assets for companies like MMFSL has increased, leading to lower securitization
income. To offset this, starting from 3QFY11, MMFSL has entered into an arrangement
with banks to earn fee income for collection of assets assigned; however, this income
would be spread over the life of the assets. At the end of FY11, outstanding collection fees
receivable stood at ~Rs250m.
Spreads improved QoQ: Spreads improved ~50bp QoQ on a calculated basis (declined
240bp YoY on account of lower securitization income), led by control on cost of funds and
hike in lending rates (50bp in 4QFY11). MMFSL has well-matched asset-liability duration.
Average duration of assets is ~26 months while average duration of liabilities is ~28 months.
100% of fixed rate assets are matched with 85% of fixed rate borrowings.
Strong business growth: AUM stood at Rs152b (up 41% YoY and 13% QoQ) in 4QFY11.
Of this, 31% exposure is to three-wheelers/UVs, 23% to tractors and 31% to cars.
Disbursements for the quarter were Rs39.6b (Rs42.4b in 3QFY11) - 33% towards cars,
29% towards three-wheelers/UVs and 22% towards tractors. Improving outlook for rural
India is leading to healthy business growth for MMFSL. Management expects growth to
moderate 25-30% in FY12 (on a high base of FY11).
Asset quality continues to show improvement: MMFSL's asset quality has shown
consistent improvement over the last 5-6 quarters. In percentage terms, GNPA has reduced
to 4% from 5.6% in 3QFY11. In value terms, GNPA has declined 23% QoQ to Rs5.4b.
Similarly, NNPA has also reduced to 0.6% of total assets during the quarter. Provision
coverage ratio has improved to ~86%, providing cushion to absorb any negative surprise
on asset quality. Total credit cost (provisions for NPAs and write-offs) for FY11 has
declined to ~1.4% from 2.7% in FY10, contributing to overall profitability improvement.
Management expects credit cost for FY12 to remain in the range of 1.5-1.7%. We have
modeled credit cost of 1.7% for FY12 and 1.9% for FY13.
Branch network expanding at desired pace, with focus on keeping CI ratio stable:
During the quarter, MMFSL added 10 new branches, taking the total to 547 as on 31
March 2011. It expects to add 30-40 branches in FY12. Cost-to-income (CI) ratio has
increased to 36.5% from 35% a quarter ago on the back of increase in employee costs (as
variable component of salary would have been accounted) and lower securitization income.
Adequately capitalized: MMFSL raised ~Rs4b through equity issuance during the quarter.
This has pushed up CAR as at 31 March 2011 to 20%, with tier-I capital of 17%. MMFSL
has declared a dividend of Rs10/share for FY11.
Valuation and view: MMFSL offers exposure to rising rural incomes and improving
financial penetration in rural/semi-urban areas. Improving outlook for rural India is leading
to healthy business growth for the company. Well-matched asset-liability duration and
rising proportion of fixed rate liabilities augur well for spreads. The company actively uses
loan assignment/securitization as a source of funding due to the capital it frees up and the
lower cost of borrowing it offers by virtue of its priority sector status. In case of any
regulatory change in respect of capital requirements on off-balance sheet items and priority
status eligibility change, MMFSL's cost of funds will rise. However, with off-books portfolio
of 15-20%, the impact would be comparatively lower. MMFSL has done well to contain
additions to NPAs, and with coverage ratio of 85%+, it is in a position to absorb any shock
on asset quality.
We estimate EPS of Rs57 and BV of Rs286 for FY12, and EPS of Rs68.5 and BV of
Rs338 for FY13. We expect return ratios to remain strong, with RoA (on AUM) at ~3.5%
and RoE at ~22%. The stock trades at 2.3x FY13E BV. MMFSL is well positioned to
sustain its qualitative growth momentum. However, premium valuations largely discount
these aspects in our view. We value the stock at 2.5x FY13E BV at Rs845, with limited
upside potential. We downgrade our recommendation from Buy to Neutral.
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