Mahindra & Mahindra Finance

Transcription

1 Initiating Coverage Mahindra & Mahindra Finance Prime pick Sturdy business model; brisk growth over FY1-13 Mahindra & Mahindra Financial Services Ltd (MMFSL), a subsidiary of M&M is one of the leading vehicle financing NBFCs in India with an AUM of Rs267bn. It has one of the largest rural and semi urban distribution franchises comprising 657 branches across 25 states and 4 UTs. Starting as a captive finance company for M&M products, the company has evolved into a diversified vehicle financier. MMFSL s localized business model and nimble loan processing lends it with a strong pricing power. During FY1 13, MMFSL witnessed robust AUM growth and sharp improvement in assets quality driven by rural upswing and structural factors such as network expansion, conservative LTV/loan tenor, robust credit appraisal/monitoring and strong collections engine. Asset and earnings growth to slow but remain impressive In view of deep macro slow down and waning momentum in rural consumption, moderation in MMFSL s disbursement growth is likely to accentuate in FY14 (~18% v/s ~22% in FY13) before recovering marginally in FY15. The deceleration in disbursements would translate into moderated though respectable asset growth of 23.5% pa over FY MMFSL s NIMs are favorably placed in a declining rate environment and therefore would remain firm despite increase in competition. Delinquencies could show an uptick and along with migration to 12 day NPL recognition should drive a material increase in credit cost in FY14/15. Consequently, earnings growth is estimated to decelerate to 18 2% over FY Valuation is not cheap but can remain so; initiate coverage with BUY MMFSL s premium valuation amongst NBFCs (2.7x 1 year roll fwd P/BV) is likely to sustain aided by better earnings growth and RoA delivery. Diversified business compared to other vehicle financiers and strong relationships with manufacturers lend higher predictability to MMFSL earnings growth. Key risks to our hypothesis would be a negative surprise in asset growth and asset quality. Initiate coverage on MMFSL with a BUY recommendation and 12 month target price of Rs283 which includes forecasted value of Rs12.5 for insurance broking business and Rs4 for rural financing business. Financial summary Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E Total operating income 16,743 22,759 28,929 35,787 Yoy growth Operating profit (pre provisions) 1,823 15,34 19,84 24,746 Net profit 6,21 8,827 1,234 12,326 yoy growth EPS (Rs) Adj. BVPS (Rs) P/E (x) P/Adj.BV (x) ROE ROA CAR June 4, 213 Rating: Sector: Sector view: Financials Positive Sensex: 19,61 52 Week h/l (Rs): 27/114 Market cap (Rscr) : 13,87 6m Avg vol ( Nos): 1,464 Bloomberg code: MMFS IB BSE code: NSE code: M&MFIN FV (Rs): 2 Price as on Jun 3, 213 Company rating grid Earnings Growth RoA Progression B/S Strength Valuation appeal Risk Share price trend MMFSL Low High Sensex 8 Jun 12 Oct 12 Feb 13 Jun 13 Share holding pattern Promoters Institutions Others 1 % BUY Target (9 12 months): Rs283 CMP: Rs243 Upside: 16.5% Sep 12 Nov 12 Dec 12 Mar 13 Research Analyst: Bhavna Sinyal Rajiv Mehta research@indiainfoline.com Company Report

2 Mahindra & Mahindra Financial Services Ltd a leading vehicle financing company in India Mahindra & Mahindra Financial Services Ltd (MMFSL), a subsidiary of Mahindra and Mahindra Limited (M&M), is one of the leading non banking finance companies in India. It has a strong distribution network of 657 offices, covering 25 states and 4 union territories, specially catering to rural and semi urban areas. MMFSL is in the business of financing purchase of new and pre owned utility vehicles, tractors, cars, commercial vehicles, construction equipments and SME Financing, and had an AUM of Rs267bn at the end of FY13. About 98% of the asset portfolio is vehicle financing, of which, ~91% is new vehicle financing and residual ~7% is used vehicle financing. Company has entered into over 2.5mn vehicle finance customer contracts since inception, of which, ~1.3mn are active currently. SME financing, started a couple of years back to finance M&M suppliers, is less than 2% of assets with the book standing near Rs4.5bn. MMFSL commenced operations in 1993 as a captive finance company for M&M products that had significant market in rural and semi urban areas. Post 22, after gaining substantial share within M&M vehicle sales, company started financing non competitive products of other manufacturers to expand operations. This led to creation of new business segments such as car financing, commercial vehicle/construction equipment financing and pre owned vehicle financing. MMFSL s strong foothold in semi urban and rural areas made it the preferred choice for auto manufacturers like Maruti that was planning to expand its sales in the hinterlands of the country. Currently, MMFSL is the second largest financier of Maruti vehicles, probably the largest in rural areas. Since a few years, company has also been financing competing products such as UVs and Tractors of other manufacturers. MMFSL through its direct marketing initiative is strengthening relationships with non M&M dealers. This evolution of the company has significantly strengthened MMFSL s business by reducing concentration to products thereby making its growth de risked and resilient. Presently, the non M&M portfolio comprises ~5% of assets financed. MMFSL has built a strong brand reputation in rural and semi urban areas with its customeroriented business model, diverse product offerings and deep presence. Group Structure Mahindra & Mahindra Ltd 51.2% Mahindra & Mahindra Financial Services Ltd 85.% 87.5% 49.% 1% Mahindra Insurance Brokers Limited (MIBL) Mahindra Rural Housing Finance Limited ( MRHFL ) Mahindra Finance USA LLC (JV with Rabobank Group subsidiary) Mahindra Business & Consulting Services Private Limited 2

3 Niche business model built on strong tenets; no significant threat of competition MMFSL positioning of being nimble than a bank and cheaper than a money lender has given expression to aspirations of millions of vehicle owners in the rural and semi urban areas. Around 8% of vehicle financed by the company are used for earnings purpose and balance 2% (mostly cars/uvs) for consumption. It is highly interactive lending done by empowered local field officers as customers usually do not have necessary documentation supporting their creditworthiness. Therefore, the local field officers need to have strong knowledge about that particular region, crops/yields, other economic activities, customers, etc and should be well versed with the local language. Loan sanctions are done at branch level with the joint decision of branch manager (who cross examines the field officer about his evaluation of the customer) and branch accountant (who handles KYC and loan documentation and may also call customers for identity verification). Business underwriting is done on strong principals of tight control on LTV and tenor. Average tenor of loans is around two years for used vehicles, three years for cars/uvs and four years for tractors and MHCVs. Further, the company does not restructure installments or the loan. Field and branch officers are interchanged every months to ensure internal discipline and to avoid any kind of fraudulent lending. Branches cannot sanction more than one loan per family and such requests require approval of higher authority. The field officers also collect the monthly instalments from the clients and they are provided with handheld devices which has all the information of their customers and which also prints receipts for the cash collected. Currently, 65% of the collection is in cash form; it used to be around 8 85% before the introduction of Car/CV financing. Through the handheld devices, branch and the central office can keep track of all the loans on a real time basis. MMFSL has brought in various innovations into the business to improve operational efficiency, strengthen customer relationship, deepen its market insight, enhance profitability and effectively compete with other players in the market. It offers a fast turnaround of two days compared to 5 6 days for other NBFCs and 1 12 days for banks. Many private and public sector banks are rapidly growing their rural branch network to tap rural financing opportunities and achieve their financial inclusion and PSL targets. Nonetheless, quick disbursement, relatively lower documentation and flexible repayment options gives MMFSL an edge over banks. Competition from other NBFCs like Shriram Transport Finance, Sundaram Finance, Magma Fincorp etc is insignificant currently given their different product strategy and regional focus. Even if competition from them intensifies, the market opportunity is large enough for all players to grow. 8% of vehicle financed by MMFSL are used for commercial purpose Being nimble than a bank and cheaper than a money lender, MMFSL enables customers to avail loans that do not have necessary documentation Business underwriting is done on strong principals of tight control on LTV and tenor 65% of the collection is in cash form Offers a fast turnaround of 2 days compared to 5 6 days for other NBFCs and 1 12 days for banks Competition from other NBFCs is insignificant currently given their different product strategy and regional focus 3

4 Extensive branch network compared to peers 7 (Nos.) 657 Better asset mix than peers CV & CE Pre owned Car/UV/2W Tractors SME Mortgage 1% % 5 6% 4 4% % 2 MMFSL STFC Chola Finance Magma Fin % MMFSL STFC Chola Finance Magma Fin Key subsidiaries in rural home financing and insurance broking In May 24, MMFSL started providing direct insurance broking for the retail and corporate customers in rural and semi urban areas and offering a range of plans for the Life as well as Non life insurance segments, through its subsidiary Mahindra Insurance Brokers Ltd. (MIBL). In September 211, MIBL was granted a composite broker license by the IRDA, thus foraying into the Reinsurance Broking business along with Direct Broking. During 213, MIBL sold 15% stake to Inclusion Resources Private Limited. In August 27, MMFSL commenced its housing finance business providing loans for home construction, purchase, extension and improvement in rural and semi urban areas through its subsidiary Mahindra Rural Housing Finance Ltd (MRHFL). National Housing Bank (NHB) owns a 12.5% equity interest in MRHFL. MRHFL operates in nine states including Gujarat, Maharashtra, Andhra Pradesh, Karnataka, Tamil Nadu and Kerala. The loan book has been growing at a fast clip and stood at Rs8.8bn at the end of FY13. Average ticket size of loans is around Rs1lac and average tenor is 5 7 years. During 213, MIBL sold 15% stake to Inclusion Resources Private Limited Outstanding housing loan book stood at Rs8.8bn as on Mar 13 MRHFL: Loan and PAT CAGR of ~89% and ~11% respectively over FY1 13 MIBL: Turnover and PAT CAGR of ~4% and ~46% respectively over FY (Rs bn) Loan Book PAT (RHS) (Rs mn) 25 1, (Rs mn) Turnover PAT (RHS) (Rs mn) FY1 FY11 FY12 FY13 FY1 FY11 FY12 FY13 1 4

5 Impressive asset growth on increasing base over FY1-13 MMFSL has witnessed a robust AUM CAGR of 37% over FY1 13. Aided by increase in financing penetration and market share gains led by strong network expansion, growth in MMFSL s disbursements (38 4% over FY1 13) has been significantly higher than market volume growth of products financed. Marginal increase in LTV in a couple of segments also helped disbursement growth in the past two years. Company benefited from its diversified presence across vehicle segments which enabled it to overcome underlying volume weakness in any of its segments. Within the asset mix, the share of CV/CE loans (large portion is LCV loans) and used vehicles loans has increased over the past two years whereas the contribution of tractor loans and car loans has declined. M&M products share in AUM has declined from 56 57% in FY1 to 53 54% in FY13 due to faster growth in non M&M business. AUM reported a robust CAGR of 37% over FY1 13 M&M products share in AUM has declined from 56 57% in FY1 to 53 54% in FY13 Vehicle Segments FY1 FY13 FY1 13 EVAF Share EVAF Share CAGR (mn) (mn) Auto/UV M&M 31, , Tractors M&M 18, , Cars & Non M&M UVs/Tract 25, , CV & CE 6, , Growth Drivers Pre owned vehicles & others 7, , Total 89, , # EVAF is Estimated Value of Assets Financed (Gross) Robust growth in underlying M&M UV sales driven by successful product launches Strong growth result of healthy M&M volume sales, prices increases, deepening financing penetration and market share gains Robust rural volume growth for Maruti + price increases, impressive penetration in other manufacturers UV/Tractor financing Strong LCV industry volume growth + prices increases + small base Reduction in the average holding period of Cars, UVs + small base AUM mix as on March % 27.% Auto/UV (M&M) Tractors (M&M) Cars & Non M&M Vehicles AUM CAGR of ~37% over FY1 13 Auto/UV (M&M) Tractors (M&M) Cars & Non M&M CV & CE Pre owned 3 (Rs bn) CAGR 36.8% 15.% CV & CE 1 32.% 7.% Pre owned vehicles and 5 FY1 FY11 FY12 FY13 5

6 Barring UVs and LCVs there has been a sharp volume growth slowdown in other segments (2) Cars Uvs Tractors LCVs M&HCVs For M&M, UVs volume growth has been robust but tractor volumes have been weak UVs Tractors (4) FY1 FY11 FY12 FY13 (1) FY1 FY11 FY12 FY13 (4.6) Significant branch expansion in past few years Growth in EVAF during FY13 was better than industry volume growth of underlying products 7 6 (Nos.) FY8 FY9 FY1 FY11 FY12 FY13 FY1 FY11 FY12 FY13 Share of CV&CE and pre owned vehicles has increased in the asset mix Auto/UV (M&M) Tractors (M&M) Cars & Non M&M CV & CE Pre owned 1% 8% 6% 4% % % FY9 FY1 FY11 FY12 FY13 6

7 Assets growth to slow down materially over FY13-15E MMFSL witnessed material moderation in disbursement growth during FY13 (~22% v/s ~35% in FY12) tracking the weakness in the underlying volume growth in key segments of M&M UVs, M&M Tractors and Cars/Non M&M UVs and Tractors. Asset growth did not manifest a sharp slowdown in FY13 though (35% v/s 38% in FY12); understandably due to robust disbursement growth in the previous two years and increase in the average tenure of loan (repayment/opening assets ratio seems to have fallen sharply in FY13). In our view, deep slow down in economic activity (8% of vehicle financed are used for earning) and moderation in rural consumption would further undermine MMFSL s disbursements growth through FY14 (~18% v/s ~22% in FY13). In FY15, disbursements growth is expected to improve (~2% v/s ~18% in FY14) on the back of revival in industrial/infra activity, lower interest rates and higher earnings/income visibility for customers. On the back of slower disbursement growth and higher base, the asset growth is estimated to slow down materially to 24% over FY13 15 as compared to 37% over FY1 13. The share of M&M portfolio in the asset mix is expected to further decline by FY15 with stronger growth in other segments. Disbursement growth moderated in FY13 (~22%) compared to ~35% in FY12 Disbursement growth is expected to be around 2%; slightly better than FY15 Share of M&M portfolio in AUM is expected to further decline by FY15 with stronger growth in other segments FY12 EVAF (%yoy) FY13 EVAF (%yoy) FY15 Vehicle Segments EVAF (mn) Share Auto/UV M&M , Tractors M&M , Cars & Non M&M UVs/Tract CV & CE Pre owned vehicles & others , , , Total , FY13 15 CAGR Growth Comments ; # EVAF is Estimated Value of Assets Financed (Gross) M&M's UV volume growth to moderate due to macro slow down and strengthened competition M&M's tractor volume growth recovery could be weak. Demand hit by higher prices/interest rate and diminishing alternate applications Rural volume growth of Maruti expected to be resilient. Strong desire of other car makers to grow in the hinterland. MMFSL to gain further inroads in non M&M tractor/uv financing Sustained strong demand for LCVs to support robust disbursement growth. LCV financing is about 6 65% of this segment. Expanding used vehicle financing market to underpin strong disbursement growth Overall disbursement growth to moderate marginally from FY13 level Moderation in disbursement growth in FY13 was accompanied by a lower repayment ratio.enabling MMFSL to sustain strong AUM growth; but disbursement weakness to show up in FY14/ Disbursement growth Repayment/Opening AUM % (RHS) FY1 FY11 FY12 FY13 FY14E FY15E 45 FY1 FY11 FY12 FY13 FY14E FY15E 7

8 Expect further increase in share of CV&CE and Pre owned vehicles in FY14/15 EVAF Auto/UV (M&M) Tractors (M&M) Cars & Non M&M CV & CE Pre owned 1% 8% 6% % % % FY1 FY11 FY12 FY13 FY14E FY15E Liability franchise has strengthened in recent years MMFSL liability profile comprises of bank term loans (51%), NCDs (25%), public fixed deposits (11%) and Assignments (12%). It is more diversified and therefore stronger than many other NBFCs who substantially rely on bank borrowings and assignments. MMFSL s brand equity and robust credit rating enables it to raise stable long term funds via NCDs (rated AA+) and fixed deposits (rated FAAA by CRISIL) at economical rates. The duration profile of NCDs/FDs is matching with duration of assets thereby reducing ALM risks. Over FY11 13, the share of such stable funding has significantly increased (from 26% to 36%) with reduction in dependence on bank borrowings (declined from 57% to 51%) and assignments (declined from 17% to 12%) thereby making the liability franchise stronger. About 8 85% of bank loans are linked to base rate and therefore 4 45% of borrowings are at floating rate. More diversified and stronger borrowing profile than many other NBFCs 8 85% of bank loans are linked to base rate; 4 45% of borrowings are at floating rate Lower reliance on bank term loans and assignments as compared to peers Shift in borrowing mix towards NCDs and FDs over FY Bank Term Loans Assignment Bank Term Loans Assignment CP/ICD NCDs FDs 1% % % 4% % MMFSL STFC Chola Finance Magma Fin % FY9 FY1 FY11 FY12 FY13 8

9 NIM to remain stable - benefits of easing funding cost likely to be passed on MMFSL has been earning impressive NIMs in the range 9 9.5% (computed). Robust margin has been a function of strong pricing power (stemming from unmatchable reach and prompt loan processing) and frugal funding base (underpinned by a high credit rating). Though borrowing cost increased in the past two years, blended yield (computed) of MMFSL has also improved though not commensurately. The lending yield improvement is likely to have been driven by stronger disbursements of UV loans and used vehicle loans attracting higher rates and also marginal increase in the blended LTV. There is typical seasonality in quarterly NIMs of MMFSL on account of underlying seasonality in asset quality. Gross NPAs spike up in first half of a fiscal (prior to monsoons and during monsoons) and subside in the second half due to robust collections on the back of improved cash flow of customers. Therefore interest reversals suppress NIM in the first nine months while in the fourth quarter most of this gets recognized again due to customer repayments. NIM trended in the range of 9 9.5% in last few years; highest among peers Robust margin has been a function of strong pricing power and frugal funding base Seasonality in NIM on account of underlying seasonality in asset quality Seasonality in NIM on account of underlying seasonality in asset quality 7 GNPA ratio NIM (RHS) Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 The outlook for NIM is sanguine despite considering that MMFSL s pricing power could weaken by the penetrating competition. The asset liability duration is favorably placed for a declining interest rate environment. As we expect monetary transmission to pick up and further reduction of policy rate by the RBI through the fiscal, the cost of bank funding is estimated to decline materially. On the NCD portfolio also, average cost would decline as incremental borrowing rates are ~1bps lower. However, there are certain low cost borrowings that may get adversely re priced during the year. The forecasted asset mix movement (towards UVs, used vehicles and CV/CE segments) should also aid margin. We therefore believe that MMFSL would get enough headroom to respond to intensifying competition without compromising its margins. Asset liability duration is favorably placed for a declining interest rate environment The forecasted asset mix movement should further aid margin. 9

10 Earning significantly higher NIM (FY13) than peers Net spread to marginally improve over FY13 15E MMFSL STFC Chola Finance Magma Fin 5.5 FY11 FY12 FY13 FY14E FY15E NIM to remain stable as benefits of easing funding cost are passed on FY11 FY12 FY13 FY14E FY15E Firm NIM and success in direct marketing to drive some improvement in cost/income ratio At the core, asset growth for MMFSL is a function of increase in field employees/branches, geographic penetration and improvement in employee/branch productivity. The employees and branch count has grown by 17% pa and 13% pa respectively over FY1 13 and their business productivity has improved by 65% and 89% respectively over the period. The substantial improvement is operating efficiency has driven a decline in company s cost/income ratio from 36% in FY11 to 33% in FY13. The current cost/avg.assets ratio at just above 3% is probably amongst the best in the industry. Substantial improvement in productivity drove a steep decline in C/I ratio from 36% in FY11 to 33% in FY13 1

11 Being present in large number of districts in India, MMFSL is now planning to enter deep into the remote areas. Company intends to add smaller branches, an extension to its already existing branches, catering to distant customers in remote villages where it foresees good business opportunity. In moderating asset growth scenario, the scope for further improvement in employee/branch productivity would be limited, in our view. Over the past two years, MMFSL has started direct marketing initiative to generate business rather than completely relying on dealers. The efforts have started to reap benefits as ~15% of incremental business is now being generated by the company itself thus saving dealer commissions. This along with firm NIMs would ensure that income grows marginally ahead of the cost over FY ~15% of incremental business is now being generated by the company itself thus saving dealer commissions. Branch productivity (EVAF/Branch) has improved substantially on the back of sharp improvement in employee productivity (EVAF/ Employee) 4 35 (Rs mn) CAGR 23.7% (Rs mn) CAGR 17.4% A decline in PCR, from 86% in FY11 to 66% in FY13, may raise concerns. Consequently, the Net NPA ratio has risen from.6% in FY11 9 to 1% in FY Given the kind by 1 ~1% in next 3 years, if these guidelines are made mandatory 5 FY1 FY11 FY12 FY13 FY1 FY11 FY12 FY13 13 Productivity improvement has driven a decline in Cost/Income ratio Underlying improvement in Cost/Avg. AUM ratio FY11 FY12 FY13 FY14E FY15E 2.5 FY11 FY12 FY13 FY14E FY15E 11

12 Stringent underwriting back strong asset quality; credit cost to increase materially though Notwithstanding the marginal increase in blended LTV of the assets, asset quality has demonstrated consistent improvement with Gross NPA ratio declining from 8.7% in FY9 to 3% in FY13. Unlike most other NBFCs, MMFSL has been recognizing NPLs on 15 days past due (dpd) basis against the current regulatory requirement of 18dpd. Also, it does not restructure installments or loan. The reduction in GNPL level is attributable to robust credit appraisal by local field officers, conservative LTV and loan tenor approach, strong collections engine and a general upswing in rural incomes strengthening repayment capacity of customers. LTVs are determined by the type of loan, loan tenor, customer s current financial health and evaluated repayment capability. With around 8% of vehicles financed used for earning by customers, the tenor of the loans is generally capped at 2 years for used vehicles, 4 years for tractors and 3 years for all other segments. On the back of low delinquencies, credit cost in the past three years has ranged 1 13bps, significantly lower than 25 3bps built by MMFSL during lending. However, the decline in PCR from 86% in FY11 to 66% in FY13 is slightly concerning. Consequently, the Net NPLs have risen from.6% to 1%. Gross NPA ratio witnessed steep decline from 8.7% in FY9 to 3% in FY13 Credit cost in the past three years has ranged 1 13bps PCR dropped from 86% in FY11 to 66% in FY13; resultantly Net NPLs rose from.6% to 1% Sharp improvement in Gross NPA ratio driven by stringent underwriting and favourable environment PCR decline attributable to lower than commensurate credit cost PCR (LHS) Credit Cost (RHS) FY9 FY1 FY11 FY12 FY13 4 FY9 FY1 FY11 FY12 FY13 Operating in rural areas, the customers are exposed to the vagaries of monsoons and fluctuations in economic activities. Therefore, in case of circumstantial NPLs, MMFSL generally does not repossess the asset for liquidation, but would provide time to the customer to upgrade. However, the company charges a penal interest for delay in payment in order to safeguard the contracted IRR. 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. The slowdown in rural economic activity (due to lackluster industrial activity, infra development, construction, mining, etc) and substantial increase in fuel costs could likely hurt repayment capacity of some customers and therefore stress MMFSL s asset quality in FY14. Further the regulatory shift to 12dpd NPL recognition in FY15 would push the GNPL ratio further higher. GNPAs spikes in the H1 of a fiscal and subsides by Q4 due to underlying seasonality in customer repayments 12

13 Consequently, we build in an increase in credit cost to 15bps in FY14 and 175bps in FY15. Such level of provisioning should enable the company to sustain or marginally improve PCR from current levels. Higher stress and shift to 12dpd NPL recognition to push GNPL ratio and credit cost higher 8. GNPA ratio Credit Cost (RHS) FY1 FY11 FY12 FY13 FY14E FY15E Robust capitalization post the recent QIP issue; RoA/RoE to moderate but remain impressive MMFSL s Tier I ratio received a strong boost from Rs8.7bn QIP issue in November 212. As at the end of FY13, the tier 1 capital stood at robust 17% 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. Over FY11 13, MMFSL has delivered best in class return ratios aided strong NIMs, operating efficiency improvement and benign credit cost. Average RoA (based on average AUM) and RoE in the aforesaid period stood at robust 3.7% and 22.9% respectively. We forecast some moderation in the profitability levels over FY14 15 with average RoA and RoE declining to 3.4% and 21.2% respectively. Albeit, this would still be one of the best in the industry as return ratios of most NBFCs is expected to moderate due to macro stress and regulatory headwind. Tier I ratio boosted by QIP issue from Rs8.7bn in November 212 Average RoA (based on average AUM) and RoE stood at robust 3.7% and 22.9% respectively over FY11 13 Delivered best in class RoA and RoE in FY13 Higher credit cost to weigh on return ratios in coming years 25. RoE (LHS) RoA (RHS) Ret on Avg.AUM Ret on Avg. Equity (RHS) MMFSL STFC Chola Finance Magma Fin. 2.5 FY11 FY12 FY13 FY14E FY15E

14 Valuation is not cheap but can remain so; initiate coverage with BUY For NBFCs, valuation typically tracks earnings growth and RoA. Driven by robust earnings growth over FY11 13 and superior RoAs, MMFSL valuation has seen substantial re rating. The stock currently trades at 2.7x 1 year rolling fwd P/BV as compared to 1.6x 12 months ago. On relative basis, valuation is much higher than other NBFCs though justified by its diversified robust business model and higher RoAs. With company s rural home financing and insurance broking subsidiaries have achieved scale, MMFSL stock price also reflects their value. We estimate earnings growth to decelerate sharply over FY13 15 due to slow down in headline revenue growth and higher credit cost. However, at 18 2% it would still be respectable in an adverse macro environment and also better than most peers. We therefore think MMFSL s premium valuation can sustain unless there is a negative surprise on asset growth and asset quality. We initiate coverage on MMFSL with a BUY recommendation with 12 month target price of Rs283. The target price includes the forecasted value of Rs12.5 for insurance broking business and Rs4 for rural financing business. Higher valuation compared to peers is justified by its diversified robust business model and higher RoA Earnings growth to decelerate sharply over FY13 15 Premium valuation can sustain unless there is a negative surprise on asset growth and asset quality Trading at 2.9x 1 yr rolling fwd P/BV significantly higher than 5 year mean of 1.9x 3 25 (Rs) 3.1x 2.6x (x) 1yr Fwd P/Adj.BV Mean Fwd P/Adj.BV 2 2.1x x x Mar 8 Sep 8 Mar 9 Sep 9 Mar 1 Sep 1 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Mar 8 Sep 8 Mar 9 Sep 9 Mar 1 Sep 1 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13, Bloomberg Rich valuation justified by higher RoA delivery SUF MMFSL FY15E P/BV (x) CIFC STFC 1.3 MGMA Avg.ROA % (FY14 15E), Bloomberg 14

15 Financials Income statement Y/e 31 Mar (Rs mn) FY12 FY13 FY14E FY15E Operating Income 27,677 38,567 48,482 58,291 Interest expense (11,23) (16,188) (2,28) (23,97) Net interest income 16,474 22,379 28,454 35,193 Non interest income Total op income 16,743 22,759 28,929 35,787 Total op expenses (5,92) (7,419) (9,125) (11,42) Op profit (pre prov) 1,823 15,34 19,84 24,746 Provisions (1,57) (2,834) (4,529) (6,349) Exceptional Items 286 Profit before tax 9,253 12,792 15,274 18,397 Taxes (3,51) (3,965) (5,4) (6,71) Net profit 6,21 8,827 1,234 12,326 Balance sheet Y/e 31 Mar (Rs mn) FY12 FY13 FY14E FY15E Equity Capital 1,27 1,126 1,126 1,126 Reserves 28,483 43,42 51,694 61,734 Networth 29,51 44,546 52,82 62,86 LT borrowings 92,97 13, ,243 21,233 Other LT liabilities 487 2,43 2,673 2,86 LT provisions 4,22 3,14 4,812 7,175 Total Non cur liab 97, , , ,268 ST Borrowings 14,491 13,12 16,42 2,118 Trade payables 3,765 4,789 5,747 6,896 Other current liab 36,299 5,372 63,566 77,881 ST provisions 4,133 6,518 9,34 13,325 Total Current liab 58,688 74,691 95,72 118,221 Equity + Liab 185, , ,62 392,349 Assets Fixed Assets 989 1,68 1,175 1,292 Non current inv. 2,131 3,451 3,9 4,62 DTA (Net) 2,12 2,382 2,51 2,626 LT loans 92, , ,612 28,141 Other non cur assets 152 1,76 1,979 2,276 Total Non cur assets 97, ,85 175, ,937 Current inv. 2,894 2,159 2,44 2,879 Trade receivables Cash 2,3 3,454 4,74 4,854 ST loans 82,48 111, , ,23 Other current assets Total Current assets 87, , , ,412 Total Assets 185, , ,62 392,349 Key ratios Y/e 31 Mar FY12 FY13 FY14E FY15E Growth matrix Net interest income Total op income Op profit (pre provision) Net profit Advances Borrowings Total assets Profitability Ratios NIM Non int inc/total inc Return on Avg Equity Return on Avg Assets Per share ratios (Rs) EPS Adj.BVPS DPS Valuation ratios (x) P/E P/Adj.BVPS Other key ratios Loans/Borrowings Cost/Income CAR Tier I capital Gross NPLs/Loans Credit Cost Net NPLs/Net loans Tax rate Dividend yield

16 Recommendation parameters for fundamental reports: Buy Absolute return of over +1% Market Performer Absolute return between 1% to +1% Sell Absolute return below 1% Published in 213. India Infoline Ltd 213 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai For Research related queries, write to: Amar Ambani, Head of Research at amar@indiainfoline.com or research@indiainfoline.com For Sales and Account related information, write to customer care: info@5pmail.com or call on