Mahindra & Mahindra Finance (Q3 FY14)

India Infoline News Service | Mumbai |

Hit by interest income de-recognition worth Rs400mn on fresh delinquencies and material increase in the cost of funds (30bps qoq), MMFSL’s NIM contracted by 50bps qoq to 8.3%.

CMP Rs239, Target Rs257, Upside 7.6%
  • Mahindra & Mahindra Financial Services Ltd (MMFSL) delivered net profit of Rs1.64bn in Q3 FY14, 33% below our expectation of Rs2.45bn. Company’s performance was marred by substantial uptick in Gross NPLs (24% qoq, ratio increased 70bps qoq to 4.8%) which impacted NIM (down 50bps qoq to 8.3%, hit multi-quarter low) and credit cost (annualized 2.2% v/s 1.7% in Q2 FY14). The presence of non-recurring expenses amounting Rs170-190mn (inflated opex growth to 39% yoy) with regards to advertising, legal and others also pressurized the bottomline.


  • As per the company, deferred cash flows due to delayed price fixing for some crops in some states, delayed harvest in South and increased stress in M&HCV segment impacted collections and thus led to recognition of substantial NPLs. While the asset quality is expected to seasonally improve in the current quarter, company remains concerned about the behavior of the Southern market (contributes 40-45% to GNPL) and M&HCV loans. Being circumspect about near-term improvement in vehicle deployment/utilization in M&HCV space, MMFSL has been preferring to repossess vehicles and selling them even at losses (meaning at a lower consideration than recoverable amount). Company wants to drive incremental disbursement growth from non-southern states and non-CV portfolios while intensifying recovery/collections effort in these areas. 


  • Robust AUM growth at 32% yoy despite significant moderation in disbursements growth was surprising; but this is likely to correct in coming quarters. MMFSL’s loan disbursements grew by modest 17% yoy during 9M FY14. Segments where loan originations slowed drastically were M&M Auto/UVs and Non-M&M Cars/UVs/Tractors driven primarily by volume decline at the market level. In product segments of M&M Tractors and pre-owned vehicles, disbursements growth remained strong. The disbursement mix has changed substantially over the past 12 months and this swing would soon start manifesting in the AUM mix. 


  • Hit by interest income de-recognition worth Rs400mn on fresh delinquencies and material increase in the cost of funds (30bps qoq), MMFSL’s NIM contracted by 50bps qoq to 8.3%. Notwithstanding the income reversal, blended lending yield as computed by us was stable qoq aided by shift in asset mix towards relatively better yielding products and 50-80bps rate hike effected by the company in Q1 FY14. NIM is expected to bounce-back sharply in the current quarter on account of seasonal correction in asset quality and continuance of favorable shift in asset mix. In the longer term, margin should remain firm given the strong pricing power of the company and expected softening of funding cost. 


  • Factoring in the disappointing earnings performance, we downgrade our FY14/15 profit estimates by 8%/4% respectively. However, asset quality risks still prevail for MMFSL especially in the Southern markets. We estimate AUM growth to slow down 21% pa in FY15/16 from the current pace of 32% yoy. With the stock correcting by 26% over the past one month, valuation has come-off steeply to 2.6x FY15 P/BV. Expecting a much better operational performance in Q4 FY14 and average RoA delivery of 3.2% over FY13-16, we do not anticipate incremental de-rating. At the same time, increased delinquency risks and moderated growth outlook could preclude any valuation recovery. We downgrade our rating on MMFSL from BUY to Market Performer with a lowered 9-12 month price target of Rs257.

Result table
(Rs mn)
Q3 FY14
Q2 FY14
% qoq
Q3 FY13
% yoy
Total Interest Income
12,658
12,031
5.2
9,956
27.1
Interest expended
(5,891)
(5,253)
12.2
(4,344)
35.6
Net Interest Income
6,767
6,779
(0.2)
5,612
20.6
Other income
53
96
(44.5)
53
0.8
Total Income
6,820
6,875
(0.8)
5,665
20.4
Operating expenses
(2,528)
(2,249)
12.4
(1,872)
35.0
Provisions
(1,796)
(1,262)
42.3
(815)
120.3
PBT
2,496
3,363
(25.8)
2,977
(16.2)
Tax
(854)
(1,151)
(25.8)
(975)
(12.4)
Reported PAT
1,642
2,212
(25.8)
2,002
(18.0)
EPS
11.7
15.7
(25.8)
14.2
(18.0)
 
Key  Ratios
Q3 FY14
Q2 FY14
chg qoq
Q3 FY13
chg yoy
NIM (%) - Computed
8.3
8.8
(0.5)
9.1
(0.8)
Income Yield (%)  - Computed
15.6
15.6
(0.0)
16.2
(0.6)
Cost of Funds (%)  - Computed
10.1
BSE 447.50 [5.35] ([1.18]%)
NSE 445.85 [7.55] ([1.67]%)

***Note: This is a NSE Chart

 

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