M&M Financial Services Ltd. (Q1 FY15)

India Infoline News Service | Mumbai |

Mahindra Finance’s (MMFS) AUM growth decelerated sharply from 22% in FY14 to 16% in Q1 FY15.

CMP Rs238, Target Rs272, Upside 14.3% 
  • AUM growth moderates as de-growth in disbursements accentuates 

  • Disbursements to be flat for the year; AUM growth at modest 10%

  • NIM impacted by substantial interest reversals; to remain stable in the longer term

  • Asset quality deteriorates sharply; PAT declines 19% yoy 

  • Monsoon uncertainty to keep valuation under check in near term; Rate stock as Accumulate

Result table
(Rs mn) Q1 FY15 Q4 FY14 % qoq Q1 FY14 % yoy
Total Operating Income 12,751 13,602 (6.3) 10,925 16.7
Interest Expenses (5,949) (5,975) (0.4) (4,761) 24.9
Net Interest Income 6,802 7,627 (10.8) 6,163 10.4
Other income 79 104 (24.7) 60 29.9
Total Income 6,881 7,732 (11.0) 6,224 10.6
Operating expenses (2,273) (2,293) (0.8) (2,064) 10.1
Provisions (2,250) (748) 200.9 (1,252) 79.6
PBT 2,358 4,691 (49.7) 2,907 (18.9)
Tax (813) (1,584) (48.7) (995) (18.3)
Reported PAT 1,545 3,107 (50.3) 1,912 (19.2)

(Rs mn) Q1 FY15 Q4 FY14 % qoq Q1 FY14 % yoy
AUM 342,707 341,331 0.4 295,000 16.2
Auto/UV (M&M) 102,812 98,986 3.9 82,600 24.5
Tractors (M&M) 65,114 64,853 0.4 56,050 16.2
Non-M&M Cars, UVs, Tractors 78,823 81,919 (3.8) 97,350 (19.0)
CV & CE (%) 47,979 51,200 (6.3) 35,400 35.5
Pre-owned vehicles, others (%) 47,979 44,373 8.1 23,600 103.3
Est value of assets financed 55,381 58,821 (5.8) 63,861 (13.3)
Auto/UV (M&M) 18,276 20,775 (12.0) 19,158 (4.6)
Tractors (M&M) 11,076 9,812 12.9 13,411 (17.4)
Non-M&M Cars, UVs, Tractors 12,184 12,941 (5.8) 14,688 (17.0)
CV & CE (%) 4,984 6,470 (23.0) 8,302 (40.0)
Pre-owned vehicles, others (%) 8,861 8,823 0.4 8,302 6.7

Key  Ratios Q1 FY15 Q4 FY14 chg qoq Q1 FY14 chg yoy
NIM (%) 7.8 8.9 (1.1) 8.4 (0.6)
Income Yield (%) 14.6 15.9 (1.3) 15.0 (0.4)
Cost of Funds (%) 9.9 9.9 0.0 9.7 0.2
Gross Spread* (%) 8.7 9.9 (1.2) 9.7 (1.0)
Net Spread* (%) 2.9 4.8 (1.9) 4.5 (1.6)
Cost to Income (%) 33.0 29.7 3.4 33.2 (0.1)
Provisions/Avg.Adv^ (%) 2.6 0.9 1.7 1.7 0.9
RoA (Cumulative) (%) 1.9 3.2 (1.3) 2.9 (1.0)
RoE (Cumulative) (%) 12.0 18.6 (6.6) 16.8 (4.8)
Gross NPA (%) 6.2 4.4 1.8 4.2 2.0
Net NPA (%) 3.0 1.9 1.1 1.9 1.1
PCR (%) 54.0 59.0 (5.0) 56.2 (2.2)
CAR (%) 18.1 18.0 0.1 19.6 (1.5)
* Company Reported, ^ Annualized 
Source: Company, India Infoline Research

AUMgrowth moderates as de-growth in disbursements accentuates  

Mahindra Finance’s (MMFS) AUM growthdecelerated sharply from 22% in FY14 to 16% in Q1 FY15. The asset growth has come-offin its key segments of Auto/UVs M&M (25% yoy), Tractors M&M (16% yoy)and Non-M&M Cars, UVs and Tractor financing (sharpest swing of -19% yoy).AUM in the pre-owned vehicles segment (100%+) continued to grow strongly on alow base while CV/CE portfolio represented high growth of 35% yoy mainly due tobase effect (in Q1 FY14, the portfolio witnessed sharp sequential contraction).Underlined by the weakened industry volume growth across vehicle categories(more severely for M&M), the disbursements continued to de-grew. Theestimated value of assets financed (EVAF), a proxy for disbursements, declinedby 13% yoy and 6% qoq. In the previous quarter, it had declined by 11% yoyimplying that disbursement momentum is incrementally weakening. This trend wasvisible across all segments except in pre-owned vehicles where company ispushing growth. 

Disbursements to be flat forthe year; AUM growth at modest 10%
While trends in industry vehicle sales is setto improve on the back of initial signs of economic recovery (tractors salescontingent on performance of monsoons though), the disbursements for MMFS isonly likely to improve by the end of the year. We therefore estimate full-yeardisbursements to be flat yoy with growth improving to 20%+ in FY16. AUM growthwhich typically lacks disbursement growth is expected to further moderate incoming quarters and stand near 10% for the year. In FY16, we estimate it to reviveto 20%.

NIM impacted by substantialinterest reversals; to remain stable in the longer term
MMFS’s NIM (computed) at 7.8% stood atmulti-quarter low and represented a sharp decline of 110bps qoq (partlyseasonal) and 60bps yoy. While the funding cost (computed) was stable duringthe quarter, the blended lending yield (computed) corrected significantly to14.6% on the back of substantial interest reversals on large amount of NPLs. Asper the company, there is no pressure on the lending yields from weak volumesand competition. In the longer term, NIM is expected to recover and stabilizeat much better than current levels driven by reduction in NPLs and softening offunding cost from cyclical peak levels.

Asset quality deterioratessharply; PAT declines 19% yoy
Gross NPLs significantly deteriorated from 4.4%at the end of FY14 to multi-quarter high of 6.2%. Apart from seasonal weaknessrelated to borrower’s cash flows, the administrative difficulties in carryingcash collections during the election period in April-May impacted the assetquality additionally. Credit cost, as a result, was high at annualized 260bpsduring the quarter. The collection efficiency in June was 4-5% higher thanApril-May. However, it is likely to remain under pressure in coming quartersdue to delayed sowing from weak monsoons. The progress of monsoons in theremaining period remains critical to any substantial correction in assetquality. We expect Gross NPL levels to decline to near 5% by the end of theyear which is the upper end of cyclical range of 3-5%. Burdened by higherprovisions, net profit declined by 50% qoq and 19% yoy.

Monsoon uncertainty to keepvaluation under check in near term; Rate stock as Accumulate
In our view, Q1 FY15 marks the end ofcyclically worst phase for MMFS and from here on company’s bottomlineperformance should improve with the pace contingent on the extent of monsoonrecovery. A visible improvement in return metrics would be seen FY16 onwardswith FY15 representing trough RoA and RoE. In the past six years, when thecompany has seen the best times and the worst times its RoA and RoE have movedin a relatively narrow range of 3-4% and 18-23% respectively. Given that returnratios are unlikely to deteriorate further, valuation (2.3x FY16 P/ABV) is notexpected to de-rate any more. However, uncertainty with regards to monsoon’sprogress and its impact on MMFS would preclude its valuation from improvingalso. We believe that any steep correction in the stock from current levelswould provide a very attractive buying opportunity to long term investors. RateMMFS as Accumulate with 9-12 month target of Rs272.    

FinancialSummary

Y/e 31 Mar (Rs m)

FY13

FY14

FY15E

FY16E

Total operating income

22,759

27,650

31,032

36,340

yoy growth (%)

35.9

21.5

12.2

17.1

Operating profit (pre-prov)

15,340

18,516

20,711

24,161

Net profit

8,827

8,873

9,314

12,314

yoy growth (%)

42.3

0.5

5.0

32.2

 

 

 

 

 

EPS (Rs)

15.7

15.7

16.5

21.9

Adj.BVPS (Rs)

74.5

80.2

88.9

105.6

P/E (x)

15.2

15.1

14.4

10.9

P/BV (x)

3.2

3.0

2.7

2.3

ROE (%)

23.8

18.6

17.2

19.8

ROA (%)

4.0

3.1

2.8

3.2

Dividend yield (%)

1.5

1.6

1.7

2.1

CAR (%)

19.7

17.1

17.3

16.3

Source: Company, India Infoline Research



***Note: This is a NSE Chart

 

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