BSE SENSEX S&P CNX 18,793 5,717 Bloomberg MMFS IN Equity Shares (m) 102.7 52-Week Range (INR) 938/590 1,6,12 Rel.Perf.(%) 7/24/30 M.Cap. (INR b) 90.7 M.Cap. (USD b) 1.7 23 October 2012 2QFY13 Results Update Sector: Financials M&M Financial Services CMP: INR893 TP: INR1,000 Buy Mahindra & Mahindra Financial Services (MMFS) 2QFY13 PAT grew 38% YoY and 16% QoQ to INR1.8b (in-line). While AUM growth remained strong during the quarter, some pressure on asset quality was evident. Key highlights: AUM growth remained strong at 34% YoY and 9% QoQ driven by continued strong traction in cars segment (+39% YoY and 9% QoQ) and healthy QoQ growth in auto / UV segment (+13% QoQ and 22% YoY). Incrementally, more than 70% of growth in AUMs was driven by these two segments. Net operating income grew 39%YoY and 10% QoQ to INR5.4b driven by healthy AUM growth and a 20bp QoQ improvement in calculated NIM on AUMs. Opex remained under control. Opex as % of avg assets remained stable QoQ at 3.5% vs 3.8% for FY12, resulting into a 52% YoY / 12% QoQ growth in operating profit (6% above est.). Asset quality was weak as GNPAs increased 13% QoQ in absolute terms. The sequential increase in GNPAs was mainly on account of one large SME loan account (INR150m) falling into NPA category. The rest of the increase in NPAs was largely spread across different segments. Valuation and view: MMFS is well positioned to sustain its qualitative growth momentum on the back of its multi-product strategy. MMFS asset quality performance was weak during the quarter, however it should improve in 2H as recoveries tend to improve (seasonal trend) with improving cash flows and rising collection efficiencies. The stock trades at 2.1x FY14E BV. Maintain Buy. Umang Shah (Umang.Shah@MotilalOswal.com) + 91 22 3982 5521 Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) + 91 22 3982 5415 Investors are advised to refer through disclosures made at the end of the Research Report. 1
Quarterly performance v/s our estimates and reasons for deviation (INR m) Y/E March 2QFY13A 2QFY13E Var. (%) Comments Net Income 5,394 5,314 2 % Change (Y-o-Y) 39 37 Operating Expenses 1,768 1,884-6 Tight control over opex maintained during the qtr Operating Profit 3,626 3,430 6 Lower than expected opex boosted operating profit % Change (Y-o-Y) 52 44 Other Provisions 836 650 29 Higher sequential increase in GNPAs led to higher than expected provisioning expenses Profit before Tax 2,790 2,780 0 Tax Provisions 914 917 0 Net Profit 1,876 1,863 1 Higher than expected operating profit growth % Change (Y-o-Y) 38 37 was offset by higher provisions Source: Company/MOSL Business growth remains strong Strong growth momentum continued during the quarter as AUMs grew by 34% YoY and 9% QoQ to INR238b. Sequentially, the AUM mix remained largely stable. Robust AUM growth was driven by momentum in cars segment (+9% QoQ, 39% YoY) and auto / UV segment (+13% QoQ, 22% YoY), which together contributed over 70% of incremental AUMs. CV and CE segment too continued to grow at a healthy pace by 59% YoY. As a result, the share of CV/CE segment in the overall AUM mix increased to 13% in 2QFY13 from ~11% a year ago. Refinance and pre-owned vehicles segment also grew by 57% YoY, albeit on a lower base. Calculated NIM on AUMs improved by 20bp QoQ; Opex remains under control Net operating income grew 39%YoY and 10% QoQ to INR5.4b driven by healthy AUM growth and a 20bp QoQ improvement in NIM on AUM. The company booked INR550m worth income from securitization (incl provision write backs) as against ~INR600m in the previous quarter. No fresh asset securitization was done during the quarter. Opex grew 19%YoY and 6% QoQ to INR1.77b (6% lower than est.). Consequently, cost to income ratio declined further to 32.8% from 33.9% in 1QFY13 and ~38% during the year ago period. Hence, strong topline growth and tight control on opex led to a healthy 52% YoY and 12% QoQ growth in operating profit (6% above est.). Asset quality deteriorates; GNPAs increase 13% QoQ GNPAs increased 13% QoQ in absolute terms, while in relative terms it remained largely stable both on a YoY as well as on a QoQ basis at 3.9%. The sequential increase in GNPAs was on account of one large SME account (INR150m) falling into NPA. Besides, the increase in NPAs was largely spread across accounts. As a result, provisioning expenses remained high at INR836m (29% above est.) v/s INR854m in the previous quarter. Provisions as % of avg assets stood at 1.7% v/s 1.8% in 1QFY13 and 1.4% in 1HFY12. Other highlights As on September 2012, MMFS overall capital adequacy stood at 16.5% with tier I ratio at 14.5%. MMFS opened 13 new branches during quarter taking total number of branches to 628. 23 October 2012 2
Borrowing mix continued to shift in favor of borrowing via. commercial papers as its share in overall borrowings mix increased to 11% from 8.7% in 1QFY13 and 0.3% as on March 2012. Meanwhile, share of bank term loans declined to 45.2% from 47.5% a quarter ago. MMFS: Highlights of 2QFY13 Concall Growth Growth remained fairly strong in 2QFY13 driven by: Buyoant rural demand and MMFS' multi product strategy. Within the cars segment, MMFS is now among the largest financiers for Hyundai as well In the tractors and CV segment, the company has tied up with multiple OEMs and is now working with almost all manufacturers The company had started its direct marketing initiative to boost sales within its existing customer base, which is now contributing ~10% of the MMFS volumes and has been one of the key contributors for growth Moreover, deeper penetration within MMFS' existing markets has also helped it gain further market share Currently, the company has SME loan portfolio of ~INR3b, which is mainly to M&M eco-system. The company does not have any plans to expand this portfolio aggressively. For FY13, the management remained confident of delivering 25-30% disbursements growth as the demand still remains buoyant Margins Margins are likely to improve in 2HFY13 given that the cost of funds has started to come off The management indicated that they may be in a position to enjoy the benefit of cost of funds as it may not be immediately passed on to customers Asset quality The increase in GNPAs during the quarter was partially on account of one SME loan worth INR150m falling into NPA. MMFS has fully provided for it and expects the same to get recovered in 3QFY13. Though monsoon got delayed but was average across regions and hence the pressure on asset quality should ease off The management remained confident about improvement in asset quality in 2HFY13 as the cash flows during the festive season are likely to improve and collection efficiencies are higher in 2H. Operating efficiency The company demonstrated tight leash on operating expenses as a result of which the overall profitability was maintained. Currently, 10% of MMFS' business comes through its direct marketing channel, which does not involve high acquisition costs and hence the opex has remained under control. However, the management indicated that there is limited headroom to further reduce opex (maybe another 20bp as a % of assets) as they are currently operating at highest efficiency levels. 23 October 2012 3
Valuation and view MMFS continues to deliver well on the growth front led by its multi-product strategy. Within the cars segment (32% of total AUM), the company is witnessing healthy traction in its non-maruti portfolio, which has helped to maintain its healthy growth momentum. With festive season kicking in, 3QFY13 will be a crucial quarter from growth perspective. We expect MMFS to sustain its growth momentum and expect 25%+ AUM growth in the current fiscal. With a 100% fixed-asset profile and roughly 50% of liabilities being floating in nature, MMFS is also likely to benefit on the margin front in a falling interest rate scenario. MMFS asset quality performance was weak in the quarter however, we believe asset quality should improve in 2HFY13 as recoveries tend to improve (seasonal trend) with improving cash flows and rising collection efficiencies. The company has announced to raise capital through QIP of upto INR9.25b to fund future growth plans. We currently have not factored in any equity dilution into our estimates. The stock trades at 2.1x FY14E BV and 9.2x FY14E EPS. Buy with a target price of INR1,000 (2.4x FY14E BV). We revise our estimates upwards for FY13/14 (INR b) Old Revised Change (%) FY13 FY14 FY13 FY14 FY13 FY14 NII (incl. Sec. Inc) 22.3 27.0 22.6 27.4 1.4 1.2 Other Income 0.4 0.4 0.4 0.4 0.0 0.0 Total Income 22.7 27.5 23.0 27.8 1.4 1.2 Operating Expenses 7.5 9.1 7.3 8.9-3.3-1.9 Operating Profit 15.1 18.4 15.7 18.9 3.7 2.8 Provisions 3.0 4.0 3.4 4.0 13.3 0.7 PBT 12.2 14.4 12.3 14.8 1.4 3.4 Tax 4.0 4.7 4.1 4.9 1.4 3.4 PAT 8.2 9.6 8.3 9.9 1.4 3.4 Credit Cost 1.5 1.6 1.7 1.6 RoA on AUM 3.6 3.5 3.6 3.6 RoE 25.1 24.6 25.4 25.3 Source: MOSL M&M Financial Services: 1 year forward P/E band M&M Financial Services : 1 year forward P/BV 23 October 2012 4
Quaterly trends AUM growth remained strong during the quarter AUM mix remains largely stable QoQ AUMs grew 34% YoY and 9% QoQ to INR238b mainly driven by growth in cars and UV segments. AUM mix remained largely stable with marginal increase in the Auto / UV segment driven by strong QoQ growth. Share of bank borrowings declined; CPs increased Gross spreads show improvement QoQ For the second consecutive quarter, the share of bank borrowings continued to decline (to 45% from 48% in 1QFY13), while that of CPs contineud to increase. Reported gross spreads improved 80bp QoQ led by stable cost of funds GNPAs increase QoQ; but remains at sub-4% levels GNPAs spike QoQ, so does provisions GNPAs in absolute terms increased 13% QoQ; but in % terms remained largely stable QoQ. Provision coverage continued to decline for second consecutive quarter due to higher increase in GNPAs. 23 October 2012 5
Quarterly Snapshot FY12 FY13 Variation (%) Cumulative Numbers 1Q 2Q 3Q 4Q 1Q 2Q QoQ YoY 1HFY12 1HFY13 YoY Gr (%) Profit and Loss (INR m) Net Income 3,443 3,870 4,264 5,166 4,916 5,394 10 39 7,313 10,310 41 Operating Expenses 1,369 1,480 1,467 1,603 1,667 1,768 6 19 2,849 3,436 21 Employee 519 510 469 500 584 589 1 15 1,030 1,173 14 Others 850 970 999 1,104 1,084 1,179 9 22 1,820 2,263 24 Operating Profit 2,074 2,389 2,797 3,563 3,248 3,626 12 52 4,463 6,874 54 Provisions 561 373 494 142 854 836-2 124 935 1,690 81 PBT 1,513 2,016 2,303 3,421 2,395 2,790 16 38 3,529 5,184 47 Taxes 491 661 756 1,144 784 914 16 38 1,152 1,698 47 PAT (after EO) 1,022 1,355 1,547 2,277 1,610 1,876 16 38 2,377 3,487 47 Asset Quality GNPA (INR m) 6,776 6,688 7,382 5,543 7,639 8,609 13 29 6,688 8,609 29 NNPA (INR m) 1,373 1,654 1,888 1,219 2,275 3,145 38 90 1,654 3,145 90 %GNPAs to total assets (%) 4.6 4.0 4.1 3.0 3.8 3.9 4.0 3.9 %NNPAs to total assets (%) 1.0 1.0 1.1 0.7 1.2 1.4 1.0 1.4 PCR (Calc., %) 79.7 75.3 74.4 78.0 70.2 63.5 Ratios (%) Cost to Income 39.8 38.3 34.4 31.0 33.9 32.8 39.0 33.3 Tax Rate 32.4 32.8 32.8 33.4 32.8 32.7 32.6 32.8 CAR 18.7 17.3 17.1 18.0 17.4 16.5 Tier I 15.8 14.7 14.6 15.1 14.7 14.0 Key Details (INR b) AUM 158 177 195 206 217 238 9 34 On book Loans 138 159 172 175 191 213 11 34 Borrowings 120 138 153 163 170 190 12 38 On book Borrowings 103 124 135 140 149 172 15 39 Off book (Securitisation) 16 14 18 23 20 17-14 26 AUM Mix (%) Auto/Utility vehicles 30 32 30 30 28 29 Tractors 23 20 20 20 20 19 Cars 31 31 31 31 32 32 Commercial Vehicles 10 11 12 12 13 13 Refinance & others 6 6 7 7 7 7 Disb. Mix Cum. (%) Auto/Utility vehicles 30 27 27 27 31 33 Tractors 22 20 20 19 19 18 Cars 28 32 32 33 27 26 Commercial Vehicles 12 11 11 11 11 11 Refinance & others 8 10 10 10 12 12 Total Borrowing Mix (%) Bank Term loans 59 54 49 55 48 45 Bonds/NCDs 18 18 21 22 22 25 Securitization 14 10 12 14 12 9 Fixed deposits 8 8 8 8 9 9 Commercial Papers 2 10 11 0 9 11 Other Details Branches (Nos.) 559 570 592 607 615 628 Employees (Nos.) 4,254 4,281 4,275 4,258 4,255 4,296 For %age change QoQ and YoY is bp Source: Company, MOSL 23 October 2012 6
EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY13 80.5 74.9 7.4 FY14 96.9 90.2 7.4 1-year Sensex rebased Shareholding pattern (%) Sep-12 Jun-12 Sep-11 Promoter 57.2 57.2 57.4 Domestic Inst 5.1 5.4 4.5 Foreign 33.3 32.7 34.5 Others 4.4 4.7 3.7 23 October 2012 7
Financials and Valuation 23 October 2012 8
Financials and Valuation 23 October 2012 9
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