Valuation and Recommendation

Transcription

1 24 th January, 2011 INR Key Data ` CMP ( `) 705 Target Price ( `) 778 Bloomberg Code MMFS IN Reuters Code MMFS.BO BSE Code NSE Code M&MFIN Face Value (`) 10 Market Cap (` Bn) Week High (`) Week Low (`) 311 Avg. Daily Volume (6m) Shareholding % Promoters 60.8 Mutual Funds / Bank/ FI 6.9 Foreign Institutional Investors 26.9 Bodies corporate/individuals/others 5.4 Total Mahindra & Mahindra Financial Services Ltd Mahindra & Mahindra Financial Services Ltd (MMFSL) reported PAT of `1158 million, up by 24% on YoY basis. Healthy loan growth enabled strong growth in NII of 36%. Asset quality performance appears on track as indicated by low NPAs. KEY HIGHLIGHTS FOR 3Q FY11: MMFSL s disbursements grew by 79% YoY in 2QFY11 to `42.4 billion. The company has indicated that there is significant opportunity in the new segments namely- Commercial vehicle space including construction equipment space, used vehicle finance. Going forward, we expect the car financing, CV financing (including construction equipment financing) and refinance segment to be the major growth drivers for MMFSL. Net interest income grew by 36% during 3QFY11 while the net profits registered a growth of 25% during 3QFY11. During the quarter the company has increased the lending rates, however the aggressive increase in the cost of funds put pressure on the margins for the company. On a YoY basis both the Gross as well as Net NPA s have reduced mainly on account of improved cash flows. In line with the RBI directive, the company has created a one-time provisioning of `2.8 billion on standard assets MMFSL has a capital adequacy ratio of 17.4% as on Dec 2010 against the requirement of 12%. Valuation and Recommendation MMFSL reported strong growth in disbursements during the 3QFY11, which led to a growth of 36% in net interest Income. Considering the traction witnessed in disbursements we expect a 39% CAGR in disbursements during FY We expect the net interest income to register a CAGR of 33% and net profits to register a CAGR of 34% during FY We recommend, ACCUMULATE on Mahindra and Mahindra financial services ltd for a target price of `778. (Implying Analyst Deepti Chauhan research@acm.co.in Tel: a 3x multiple to its book value of ` 259 for FY12). 1

2 Disbursement growth MMFSL s disbursements grew by 79% YoY in 2QFY11 to `42.4 billion. The disbursement mix continues to undergo change with the focus of the company shifting to cars as well as the CV financing segment. With growth being led by the car segment the share of this segment in the total disbursement has gone up from 29% in 3QFY10 to 33% in 3QFY11. Source: Company The company has indicated that there is significant opportunity in the new segments namely- Commercial vehicle space including construction equipment space, used vehicle finance, housing loan segment. Commercial vehicle space (including construction equipment financing)- At present this contributes 7% of the book and management expect the share of this segment to reach a sizeable 15% in near term. M&M s foray into heavy commercial vehicles segment in partnership with Navistar is expected to drive disbursements for this segment. The venture is expected to sell around units in FY11 of which MMFSL is targeting 20% of the sales. The loan to value expected in this segment is 75%. In the construction equipment space the company is targeting to lend to the subcontractor segment. The company is witnessing a lot of construction activity picking up in the rural areas and expects to benefit out of the same. The company is financing around 8-10 vehicles in a month at present and is hoping to increase the same to about vehicles a month. The company is looking for tie-ups in this segment after 2

3 achieving a particular scale. Out of 15%, the share of this segment is likely to be 3%. With yields in the range of 13-14% for this segment, the margins are likely to be in the range of 3-4%. The company is eyeing an AUM of `30 billion by FY13. MMFSL also expects the used vehicle car financing as a high-potential opportunity. Earlier the company was financing 1,000 vehicles, which has now gone upto 1800 vehicles. Maruti off late has got very aggressive where it is intends to commence True value stores at every dealer, which MMFSL eyes as an opportunity. These are high yielding segments where the average yields are about 23-24%. Therefore with the increase in the share of this segment in the total disbursements we believe that this will improve the yields for the company. The company is eyeing an AUM of `20 billion by FY13. Going forward as well, we expect the car financing, CV financing (including construction equipment financing) and refinance segment to be the major growth drivers for MMFSL. Considering the robust growth witnessed by MMFSL in disbursements, we expect the disbursements to register a 41% CAGR during FY Borrowing profile The borrowing profile has also undergone a change in 3QFY11 as the share of NCD in total borrowings declined while that of banks increased. MMFSL also has resorted to short term borrowings during the quarter in the form of commercial papers with the share of this source increasing from 8% in 2QFY11 to 11% during 3QFY11. However bank continues to be major source of borrowings for MMFSL. Asset quality remains strong The asset quality has witnessed significant improvement with the Gross NPAs declining from 8.7% as on 3QFY10 to 5.6% as on 3QFY11 versus 5.8% as on 2QFY11. The Net NPAs has declined on a YoY from 2.3% as on 3QFY10 to 1.1% as on 3QFY11. The management has indicated that the cash collections are improving in the rural areas. Going forward as well the asset quality is expected to improve. In line with the RBI directive, the company has created a one-time provisioning of `2.8 billion on standard assets reflected as an exceptional item in the profit and loss account. 3

4 Capital Adequacy MMFSL has a capital adequacy ratio of 17.4% as on Dec 2010 against the requirement of 12%. With robust growth being witnessed in business, the company has indicated the need for capital for which they have already passed a resolution for a QIP. Net Interest Margins With the general increase in the interest rates, the cost of funds increased, however the company has increased its lending rates by 50 bps each in Nov and Dec As a result the lending rates have gone up during the quarter, however the increase in the cost of funds have not offset the increase in the lending rates. Therefore margins have been under pressure. Going forward as well, we expect the net interest margins to decline from 11.3% as on FY10 to 11.1% as on FY12. Rural Housing Rural housing finance arm of MMFSL reported net profits of `61 million during the nine months ended Dec The loan book has expanded from `2,110 million in 2QFY11 to `2577 million in 3QY11. Although the current AUM in the rural housing finance business is a mere `1.7bn, the management intends to scale this business to the size of `12 billion by FY13 and hope to achieve a scale of `60 billion by FY16. The average ticket size of loans in this segment is `0.2 million. The asset quality is robust in this segment with zero NPA levels. Although the contribution from this segment is insignificant at present, we believe that this segment would be the next growth driver for the company. However we have not factored any potential revenues from these segments in our future earnings estimates. Valuation and Recommendation MMFSL reported strong growth in disbursements during the 3QFY11, which led to a growth of 36% in net interest Income. Considering the traction witnessed in disbursements we expect a 39% CAGR in disbursements during FY We expect the net interest income to register a CAGR of 33% and net profits to register a CAGR of 34% during FY We recommend ACCUMULATE on Mahindra and Mahindra financial services ltd for a target price of `778.(Implying a 3x multiple to its book value of `259 for FY12). 4

5 Interim Results (` Mn) 3QFY11 3QFY10 % Chng 2QFY11 % Chng Interest Income Interest expended Net Interest Income Income from securitization Other Income Operating Income Operating Expenses Profit before provisioning Provision Exceptional Item Profit before taxes Provisions for taxes Net Profit Equity Share capital EPS Source: Company Earnings Summary Particulars FY09 FY10 FY11E FY12E Interest Income 12, , , ,522.6 Interest expended 5, , , ,492.8 Net Interest Income 7, , , ,029.8 Income from securitization 1, , , ,271.1 Other Income Operating Income 8, , , ,773.4 Operating Expenses 2, , , ,096.0 Pre Provisioning Profits 6, , , ,677.4 Provisions & contingencies 2, , , ,360.1 Prior period items/exceptional Items Profit before Taxes 3, , , ,317.3 Provisions for taxes 1, , , ,167.9 Net Profit 2, , , ,149.4 Source: Company, ACMIIL research ` Mn 5

6 Sources and Application of Funds `Mn Particulars FY09 FY10 FY11E FY12E Liabilities Capital Reserves & Surplus 13, , , Networth 14, , , ,481.8 Borrowings 52, , , ,076.6 Total 66, , , ,558.4 Assets Fixed assets Investments 1, , , ,300.0 Deferred Tax assets 1, , , ,500.0 Loans and Advances 68, , , ,381.8 Net Current Assets -4, , , ,467.2 Total 66, , , ,558.4 Source: Company, ACMIIL research Key Ratios FY09 FY10 FY11E FY12E Spreads Cost of Borrowings 9.9% 8.6% 9.2% 9.5% Yield on Advances 17.9% 17.6% 18.1% 18.3% Net Interest Income 8.0% 9.0% 8.9% 8.8% Net interest margins 10.7% 11.3% 11.2% 11.1% Profitability ratios Return On Average Assets (ROAA) 3.3% 4.61% 4.58% 4.60% Return On Average Net worth (ROANW) 15.4% 21.4% 23.8% 26.6% Balance sheet ratios Loan to borrowings ratio (%) Debt/Equity Ratio (Times) Growth Ratios Borrowings 2.9% 23.9% 46.9% 32.9% Loans 2.9% 22.5% 45.1% 31.1% NII Growth 16.8% 20.4% 32.2% 34.2% Book value 11.2% 28.7% 21.5% 24.5% EPS 20.5% 59.3% 31.6% 36.0% Valuation ratios EPS (`.) Book value (`.) P/E (X) P/BV (X) Source: Company, ACMIIL research 6

7 Notes Institutional Sales: Ravindra Nath, Tel: Kirti Bagri, Tel: K.Subramanyam, Tel: Institutional Dealing: Disclaimer: This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in the report. ACMIIL and/or Promoters of ACMIIL and/or the relatives of promoters and/or employees of ACMIIL may have interest/position, financial or otherwise in the securities mentioned in this report. To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views expressed in the report. This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may from time to time have positions in and buy and sell securities referred to herein. SEBI Regn No: BSE INB (Cash); INF (F&O), NSE INB (Cash); INF (F&O) 7