Mahindra & Mahindra Financial Services Ltd (Q1 FY14) – BUY
India Infoline News Service | Mumbai |
We maintain BUY recommendation with a target price of Rs293, implying 27.5% upside from current level.
CMP Rs230, Target Rs293, Upside 27.5%
Mahindra & Mahindra Financial Services Ltd (MMFSL) delivered a net profit of Rs1.9bn in Q1 FY14 nearly in-line with our expectation of Rs2bn. AUM growth was robust at 6.4% qoq/34.1% yoy, better than our expectation driven by strong growth of 31.8% yoy in estimated value of assets financed (proxy for disbursements). Strong AUM growth has not come at the cost of increased risk. Underwriting principles continue to remain stringent with LTV capped at 70% and average tenor of ~3 years. The credit segments contributing significantly to high growth were pre-owned vehicle segment (21.6% qoq) followed by Non-M&M segment (9.7% qoq) and M&M Tractors (6.4% qoq). Growth in CV&CE segment continued to remain sluggish reporting de-growth of 1.8% sequentially. Management has deliberately curtailed disbursement of HCV loans given the challenges confronted by this segment. M&M Tractor finance growth picked up backed by improvement in tractor sales; it is likely to remain healthy in the ensuing quarters in anticipation of good monsoons and increased cash flows at the disposal of small farmers and traders. We expect ~26% AUM growth in FY14 largely driven by Pre-owned vehicle financing, tractors and UVs.
Borrowings rose by 5.4% qoq/33.5% yoy. As part of management strategy, growth was largely driven by short term borrowings (CPs/ICDs) in Q1 FY14. Growth in NCDs (16.5% qoq) and FDs (16.8% qoq) were significant resulting in an increase in their share in total borrowing by 270bps qoq and 120bps qoq respectively. Growth in Bank Term Loans and Assignments were relatively muted at 19% yoy and 9.4% yoy. Increasing dependence on stable funding sources (FDs and NCDs) and reduction in proportion of bank borrowings and assignments has strengthened the liability franchise.
NIM (computed) declined steeply in Q1 FY14 as expected, led by higher slippages cropping in the first quarter of the financial year. MMFSL has raised its lending rate by 50-80bps across the products in Q1 FY14. It may consider a further increase in the wake of increase in funding cost in order to safeguard its margins. Also, focus on relatively higher yielding credit segments like pre-owned vehicles and tractors and improving liability profile would support margins. Taking into consideration all these aspects, we expect NIM to remain stable in FY14.
GNPA ratio rose significantly from 3% in Q4 FY13 to 4.2% in Q1 FY14. Higher slippages were witnessed in southern India (specifically Andhra Pradesh and Karnataka) and segment-wise CVs contributed significantly. Typically seen with MMFSL is that GNPAs usually spike in the first half of a fiscal and subsides by the end of the fourth quarter due to underlying seasonality in customer repayments. However, the decline in PCR from 66% in Q4 FY13 to 56% in Q1 FY14 is slightly concerning. Anticipating an improvement in monsoons, revival in economic activity in southern India and enhanced recovery efforts, asset quality is likely to improve in H2 FY14.
Cost/Income ratio rose by 2ppt qoq to 33% in Q1 FY14 led by lower interest income. Firm NIM and success in direct marketing initiative is likely to drive some improvement in cost/income ratio going forward. The Tier‐1 capital stood at robust 16.4% being significantly higher than the minimum regulatory requirement. In our view, current capitalization would be more than adequate to fund the estimated asset growth over the next two years.
Robust AUM/disbursement growth, improving liability franchise, favourable shift in portfolio mix and lean operating structure reinstate our confidence in MMFSL’s earnings growth. We upgrade our AUM growth and resulting earnings estimates for FY14-15. The stock correction of ~20% in last two weeks, currently trading at 2.4x FY15E P/adj.BV, is a good buying opportunity in our view. We maintain BUY recommendation with a target price of Rs293, implying 27.5% upside from current level.
Result table
Source: Company, India Infoline Research
Financial Summary
Mahindra & Mahindra Financial Services Ltd (MMFSL) delivered a net profit of Rs1.9bn in Q1 FY14 nearly in-line with our expectation of Rs2bn. AUM growth was robust at 6.4% qoq/34.1% yoy, better than our expectation driven by strong growth of 31.8% yoy in estimated value of assets financed (proxy for disbursements). Strong AUM growth has not come at the cost of increased risk. Underwriting principles continue to remain stringent with LTV capped at 70% and average tenor of ~3 years. The credit segments contributing significantly to high growth were pre-owned vehicle segment (21.6% qoq) followed by Non-M&M segment (9.7% qoq) and M&M Tractors (6.4% qoq). Growth in CV&CE segment continued to remain sluggish reporting de-growth of 1.8% sequentially. Management has deliberately curtailed disbursement of HCV loans given the challenges confronted by this segment. M&M Tractor finance growth picked up backed by improvement in tractor sales; it is likely to remain healthy in the ensuing quarters in anticipation of good monsoons and increased cash flows at the disposal of small farmers and traders. We expect ~26% AUM growth in FY14 largely driven by Pre-owned vehicle financing, tractors and UVs.
Borrowings rose by 5.4% qoq/33.5% yoy. As part of management strategy, growth was largely driven by short term borrowings (CPs/ICDs) in Q1 FY14. Growth in NCDs (16.5% qoq) and FDs (16.8% qoq) were significant resulting in an increase in their share in total borrowing by 270bps qoq and 120bps qoq respectively. Growth in Bank Term Loans and Assignments were relatively muted at 19% yoy and 9.4% yoy. Increasing dependence on stable funding sources (FDs and NCDs) and reduction in proportion of bank borrowings and assignments has strengthened the liability franchise.
NIM (computed) declined steeply in Q1 FY14 as expected, led by higher slippages cropping in the first quarter of the financial year. MMFSL has raised its lending rate by 50-80bps across the products in Q1 FY14. It may consider a further increase in the wake of increase in funding cost in order to safeguard its margins. Also, focus on relatively higher yielding credit segments like pre-owned vehicles and tractors and improving liability profile would support margins. Taking into consideration all these aspects, we expect NIM to remain stable in FY14.
GNPA ratio rose significantly from 3% in Q4 FY13 to 4.2% in Q1 FY14. Higher slippages were witnessed in southern India (specifically Andhra Pradesh and Karnataka) and segment-wise CVs contributed significantly. Typically seen with MMFSL is that GNPAs usually spike in the first half of a fiscal and subsides by the end of the fourth quarter due to underlying seasonality in customer repayments. However, the decline in PCR from 66% in Q4 FY13 to 56% in Q1 FY14 is slightly concerning. Anticipating an improvement in monsoons, revival in economic activity in southern India and enhanced recovery efforts, asset quality is likely to improve in H2 FY14.
Cost/Income ratio rose by 2ppt qoq to 33% in Q1 FY14 led by lower interest income. Firm NIM and success in direct marketing initiative is likely to drive some improvement in cost/income ratio going forward. The Tier‐1 capital stood at robust 16.4% being significantly higher than the minimum regulatory requirement. In our view, current capitalization would be more than adequate to fund the estimated asset growth over the next two years.
Robust AUM/disbursement growth, improving liability franchise, favourable shift in portfolio mix and lean operating structure reinstate our confidence in MMFSL’s earnings growth. We upgrade our AUM growth and resulting earnings estimates for FY14-15. The stock correction of ~20% in last two weeks, currently trading at 2.4x FY15E P/adj.BV, is a good buying opportunity in our view. We maintain BUY recommendation with a target price of Rs293, implying 27.5% upside from current level.
Result table
| (Rs mn) | Q1 FY14 | Q4 FY13 | % qoq | Q1 FY13 | % yoy |
| Total Interest Income | 10,925 | 11,103 | (1.6) | 8,351 | 30.8 |
| Interest expended | (4,761) | (4,471) | 6.5 | (3,475) | 37.0 |
| Net Interest Income | 6,163 | 6,632 | (7.1) | 4,876 | 26.4 |
| Other income | 60 | 153 | (60.4) | 39 | 53.7 |
| Total Income | 6,224 | 6,784 | (8.3) | 4,916 | 26.6 |
| Operating expenses | (2,064) | (2,112) | (2.2) | (1,667) | 23.8 |
| Provisions | (1,252) | (329) | 281.1 | (854) | 46.7 |
| PBT | 2,907 | 4,344 | (33.1) | 2,395 | 21.4 |
| Tax | (995) | (1,292) | (23.0) | (784) | 26.9 |
| Reported PAT | 1,912 | 3,052 | (37.4) | 1,610 | 18.7 |
| EPS | 13.6 | 23.7 | (42.7) | 12.5 | 8.3 |
| Key Ratios | Q1 FY14 | Q4 FY13 | chg qoq | Q1 FY13 | chg yoy |
| NIM (%) | 8.8 | 10.1 | (1.3) | 9.3 | (0.5) |
| Gross Spread (%) | 9.7 | 10.6 | (0.9) | 9.5 | 0.2 |
| Net Spread (%) | 4.5 | 5.8 | (1.3) | 4.2 | 0.3 |
| Cost to Income (%) | 33.2 | 31.1 | 2.0 | 33.9 | (0.8) |
| Provisions/Income (%) | 20.1 | 4.8 | 15.3 | 17.4 | 2.8 |
| BV (Rs) | 81.7 | 78.3 | 3.4 | 302.3 | (220.6) |
| RoE (%) | 16.8 | 23.5 | (6.7) | 19.6 | (2.8) |
| CAR (%) | 19.6 | 19.7 | (0.1) | 17.4 | 2.2 |
| Gross NPA (%) | 4.2 | 3.0 | 1.2 | 3.8 | 0.4 |
| Net NPA (%) | 1.9 | 1.0 | 0.9 | 1.2 | 0.7 |
| Provision Coverage Ratio (%) | 56.2 | 65.9 | (9.7) | 70.2 | (14.0) |
Financial Summary
| Y/e 31 Mar (Rs m) | FY12 | FY13 | FY14E | FY15E |
| Total operating income | 16,743 | 22,759 | 29,511 | 37,446 |
| yoy growth (%) | 27.1 | 35.9 | 29.7 | 26.9 |
| Operating profit (pre-provisions) | 10,823 | 15,340 | 20,310 | 26,221 |
| Net profit | 6,201 | 8,827 | 10,434 | 13,062 |
| yoy growth (%) | 33.9 | 42.3 | 18.2 | 25.2 |
| EPS (Rs) | 12.1 | 15.7 | 18.5 | 23.2 |
| Adj. BVPS (Rs) | 55.1 | 74.5 | 85.3 | 97.7 |
| P/E (x) | 19.0 | 14.7 | 12.4 | 9.9 |
| P/adj.BV (x) | 4.2 | 3.1 | 2.7 | 2.4 |
| ROE (%) | 22.8 | 23.8 |
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