S t o c k I d e a M & M FINANCIAL SERVICES LTD BUY Date: 14-June-13 CMP: `242 TARGET: `307 Upside: 27% SENSEX 19089 NIFTY 5785 Eq. Cap. (` Crs) 113.75 Face Value (`) 2.0 M. Cap (` Crs) 14,219 BSE Code 532720 NSE Code Financial Year M&MFIN Apr-Mar 52-w H/L 270/114 Avg. Daily Vol. 129,693 TTM EPS (`) 17.43 P/E (x) 14.8x BVPS (`) 82.67 P/BVPS (x) 2.93x Dividend Yield 1.06% Mahindra & Mahindra Financial Services Ltd (MMFSL) is one of India s leading nonbanking finance companies focused on the rural and semi-urban sector. It is primarily in the business of providing loans for new and pre-owned auto and utility vehicles, tractors, cars and commercial vehicles predominantly in rural and nonmetro geographies through its network of ~657 branches.. Well established Brand Identity: brand recall + synergies with M&M Group MMFSL promoter M&M, the flagship company of the Mahindra Group, was ranked by Forbes amongst top 200 most reputable companies in the world. M&M has been selling automotive and farm equipment in semi-urban and rural markets for ~ 65 years. Automobile Finance Market to grow by 19-21% over the next 5 years By the FY2017E, penetration levels are expected to increase to 74% for cars and 66% for utility vehicles from 68% and 62% respectively as a result of a moderation in interest rates and alleviation of credit risk. Diversified Product Portfolio MMFSL has built a diversified product portfolio that helped it to cope with a slowdown in individual segments. While the company capitalised on the tractor finance business after M&M acquired Punjab Tractors (PTL), its focus on car finance (initially with Maruti Suzuki India Ltd and, now, with other players) aided high growth over the past few years. The proportion of UVs and tractor segment has come down from 63% as on FY08 to 50% as on FY13, thus reducing the dependency on financing of parent M&M s vehicles. Extensive branch network: focused on the rural and semi-urban market MMFSL plans to continue with expanding its office network and increase the market share of its existing products and services in the rural and semi-urban markets of India. MMFSL has an extensive branch network with presence in 25 states and 4 union territories in India through 657 offices as of March 31, 2013. Moreover the branches have authority to approve loans within prescribed guidelines. Consistent Financial Performance + Robust Asset Quality Stock vs. Sensex Guidance: FY2014E - Proposes to add 50-60 branches in FY14E Company expects further improvement in cost-to-income ratio with the portfolio diversification, which has consistently improved from 36.3% in FY2011 to 35.4% in FY2012 and further down to 32.6% in FY2013. The asset quality remains stable and company expects it to further strengthen. Company sees the rural market as a big opportunity and proposes to grow faster and deeper. To increase the rural penetration, company has opened 50 branches in FY2013 and plans to add 50-60 branches in FY2014E. At the CMP of Rs.242, the stock is trading at 14.8x FY13 adjusted EPS of Rs.16.30 and 2.93x of its FY13 Book Value of Rs.82.67. We recommend BUY on the stock with a 12-18 months target price of Rs.307, providing an upside of 27% from the current levels. Please Refer DISCLAIMER on the Last Page
Company Profile Mahindra & Mahindra Financial Services Ltd (MMFSL) - a subsidiary of Mahindra & Mahindra Ltd is one of India s leading non-banking finance companies focused on the rural and semi-urban sector. It is primarily in the business of providing loans for new and pre-owned auto and utility vehicles, tractors, cars and commercial vehicles predominantly in rural and nonmetro geographies through its network of ~657 branches. Though the company was predominantly into financing of M&M UVs and tractors till FY02, it has since then increased its lending to non M&M vehicles. Over the years, it has also ventured into insurance broking, mutual fund distribution and rural housing finance. The company also operates subsidiaries including rural housing finance and insurance broking. MMFSL seeks to position itself between the organised banking sector and local money lenders, offering its customers competitive, innovative, and speedy lending services. Key strengths of the company is its strong relationship with dealers, in-depth understanding of the market, its wide network of branches, a large locally recruited employee force and efficient management of asset quality risks, besides a strong brand. MAHINDRA & MAHINDRA LTD 51.2% M&M Financial Services Ltd 85% 87.5% 49% 100% Mahindra Insurance Brokers Ltd. (MIBL) Mahindra Rural Housing Finance Ltd. (MRHFL) Mahindra Finance USA LLC (JV with Rabobank Group Subsidiary) Mahindra Business & Consulting Services Pvt Ltd. The journey so far has been impressive M & M Financial Services Ltd. 2 14-June-2013
INVESTMENT POSITIVES Well established Brand Identity: brand recall + synergies with M&M Group MMFSL promoter M&M, the flagship company of the Mahindra Group, was ranked by Forbes amongst top 200 most reputable companies in the world in 2009. M&M has been selling automotive and farm equipment in semiurban and rural markets for ~ 65 years. The Mahindra Group is one of the largest business conglomerates in India and has a strong presence in UVs, tractors and IT, financial services, aerospace, real estate, hospitality and logistics sectors. We believe MMFSL relationship with the Mahindra Group provides brand recall and the company will continue to derive significant marketing and operational benefits, such as being a preferred lender at M&M and MTWL dealerships by leveraging its relationship with the Group. Reduction in holding period, which increases the demand for 2 nd vehicle Increase in Dealerships and access to Finance Increase in Affordability Overall Demand Drivers Reduction in holding period, which increases the demand for 2 nd vehicle Entry of New Players & New model launches Growth in Addressable Market Growth in Economic Activity Automobile Finance Market to grow by 19-21% over the next 5 years Source: Company By the FY2017E, penetration levels are expected to increase to 74% for cars and 66% for utility vehicles from 68% and 62% respectively as a result of a moderation in interest rates and alleviation of credit risk. Loan-to-value (LTVs) expected to increase marginally to 75% for cars and 71% for UVs from 74% and 70% respectively over the next 5 years. M & M Financial Services Ltd. 3 14-June-2013
Domestic Car and UV Industry: Strong Long term prospects Addressable market is expected to grow at a CAGR of 16% to reach 139 Mn households in 2017-18 from 67 Mn in 2012-13 UV sales expected to grow at 15-17%. Moderation in growth due to expected diesel price hikes. Small Cars segment is expected to grow marginally lower than sedan with sedan sales growing at 12-14% as a result of high petrol prices With 11 cars per 1000 people, India s potential is greater (China 26, Thailand 70, Brazil 125, Russia 251) Source: Company Diversified Product Portfolio MMFSL has built a diversified product portfolio that helped it to cope with a slowdown in individual segments. While the company capitalised on the tractor finance business after M&M acquired Punjab Tractors (PTL), its focus on car finance (initially with Maruti Suzuki India Ltd and, now, with other players) aided high growth over the past few years. M & M Financial Services Ltd. 4 14-June-2013
The proportion of UVs and tractor segment has come down from 63% as on FY08 to 50% as on FY13, thus reducing the dependency on financing of parent M&M s vehicles. CV & Const. Equip. 14% Pre-Owned Vehicle 12% Auto & Utility Vehicles 31% Assets Finance: Break up FY13 Cars 24% Tractors 19% Strong AUM growth continues along with improvement in asset quality 15% 7% 32% Break-up of AUM (FY13) 27% Broad-based Liability Mix 19% Auto & Utility Vehicles (M&M) Tractors (M&M) Cars and Non M&M UVs, Tractors & SCVs CV & Const. Equip. Pre-Owned Vehicle & Others CRISIL has assigned AA+/Stable, FITCH has assigned AA+(ind)/ Stable and Brickwork has assigned AA+/ Positive rating to the Company s long term and subordinated debt M & M Financial Services Ltd. 5 14-June-2013
Extensive branch network: focused on the rural and semi-urban market Knowledge of rural and semi-urban market holds the key MMFSL plans to continue with expanding its office network and increase the market share of its existing products and services in the rural and semiurban markets of India. MMFSL has an extensive branch network with presence in 25 states and 4 union territories in India through 657 offices as of March 31, 2013. Moreover the branches have authority to approve loans within prescribed guidelines. Branch Network 700 600 547 607 657 500 400 436 459 300 256 200 151 100 0 Mar'02 Mar'05 Mar'08 Mar'10 Mar'11 Mar'12 Mar'13 The company has plans to have presence at least one office per district in India to be in the vicinity of the local customer base. We believe MMFSL knowledge of the rural and semi-urban markets is a key strength that has enabled it to become one of India s leading NBFCs providing financial services to these markets. FY2013: Disbursement grew 22% without compromising asset quality MMFSL registered a disbursement growth of 22%, during the year ended March 2013, against the corresponding period last year, maintaining its leadership position for vehicles and tractors in the rural and semi urban markets. Book value (BVPS) of the company stood at Rs 81.34 per share on a consolidated basis and Rs 79.12 per share on a standalone basis at end March 2013. Consistent Financial Performance + Robust Asset Quality M & M Financial Services Ltd. 6 14-June-2013
Guidance: FY2014E - Proposes to add 50-60 branches in FY14E Company expects further improvement in cost-to-income ratio with the portfolio diversification, which has consistently improved from 36.3% in FY2011 to 35.4% in FY2012 and further down to 32.6% in FY2013. The asset quality remains stable and company expects it to further strengthen. Company sees the rural market as a big opportunity and proposes to grow faster and deeper. To increase the rural penetration, company has opened 50 branches in FY2013 and plans to add 50-60 branches in FY2014E. Company has tied up with almost all auto manufacturers for extending vehicle loans, while it is in talks with Nissan currently. Mahindra Rural Housing Finance proposes to improve the loan book 4.5 times to Rs 4000 crore by FY2015 from current Rs 900 crore at end March 2013 Mahindra Rural Housing Finance has doubled the customer base to 1.25 lakh spread across 35000 villages. Mahindra Insurance Brokers contributing 5% of the profit of company proposes to emerge as number one insurance broker in India in terms of revenue by FY2015E. As per the company, the insurance cover for ~65% of the vehicles is not renewed offering the business opportunity. Impressive Shareholding M & M Financial Services Ltd. 7 14-June-2013
VALUATIONS At the CMP of Rs.242, the stock is trading at 14.8x FY13 adjusted EPS of Rs.16.30 and 2.93x of its FY13 Book Value of Rs.82.67. We recommend BUY on the stock with a 12-18 months target price of Rs.307, providing an upside of 27% from the current levels. Source: Company, Capitaline Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052. Tel. (022) 4082 4082, Fax (022) 2649 7997. research@lmspl.com www.latinmanharlal.com, LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana, Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh) This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and its affiliates may act as market maker or have assumed an underwriting position in the secure-ties of companies discussed herein and may sell them to or buy them from customers on a principal basis. M & M Financial Services Ltd. 8 14-June-2013