25 th Oct, 2010 INR Key Data ` CMP ( `) 654 Target Price ( `) 765 Bloomberg Code MMFS IN Reuters Code MMFS.BO BSE Code 532720 NSE Code M&MFIN Face Value (`) 10 Market Cap (` Bn) 63 52 Week High (`) 734 52 Week Low (`) 236 Avg. Daily Volume (6m) 225309 Shareholding % Promoters 61.0 Mutual Funds / Bank/ FI 7.1 Foreign Institutional Investors 26.3 Bodies corporate/individuals/others 5.6 Total 100.0 Mahindra & Mahindra Financial Services Ltd Mahindra & Mahindra Financial Services Ltd (MMFSL) reported PAT of `1165 million, up by 68% on YoY basis. Healthy loan growth enabled strong growth in NII of 40%. Asset quality performance appears on track as indicated by low NPAs. KEY HIGHLIGHTS FOR 2Q FY11: MMFSL s disbursements grew by 54% YoY in 2QFY11 to `33.6 billion. 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 40% during 2QFY11 mainly led by expansion in net interest margins. Although yields declined during 2QFY11, the reduction in cost of funds offset the decline. During the 2QFY11, MMFSL reported margins of 12.5% against 11.8% reported in 2QFY10.The net profits have registered a YOY growth of 68% in 2QFY11 to `1,165 million. On a YoY basis both the Gross as well as Net NPA s have reduced mainly on account of improved cash flows. Going forward the asset quality is expected to improve given the post harvest period and festival season. MMFSL has a capital adequacy ratio of 16.5% as on Sep 2010 against the requirement of 12%. Valuation and Recommendation MMFSL reported strong growth in disbursements during the 2QFY11, which led to a growth of 40% in net interest Income. Considering the traction witnessed in disbursements we have revised our disbursement CAGR for FY10-12 from 21% earlier to 30%. We have revised our earnings estimates by 7% and 9.6% for FY11 and FY12 respectively to factor in higher loan growth and significant improvement in asset quality witnessed by the company. We expect the Net interest income to register a Analyst Deepti Chauhan research@acm.co.in Tel: +91-22 2858 3408 CAGR of 26% during FY0-12 and the earnings to register a growth of 28% during the same period. We recommend BUY on Mahindra and Mahindra financial services ltd for a target price of `765. (3x it s PBV of `255 for FY12E.) 1
Disbursement growth MMFSL s disbursements grew by 54% YoY in 2QFY11 to `33.6 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 2QFY10 to 33% in 2QFY11. 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. The management had earlier guided for a disbursement growth of 20-25% for FY11, which has now been revised, to 35-40% for the year. Considering the robust growth witnessed by MMFSL in disbursements, we have revised our disbursement CAGR for FY10-12 from 21% earlier to 30%. Source: Company Borrowing profile The borrowing profile has also undergone a change in 2QFY11 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 merely 2% in 1QFY11 to 8% in 2QFY11. 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 9% as on 2QFY10 to 5.8% as on 2QFY11 versus 6.4% as on 2
1QFY11. The Net NPAs although has declined on a YoY from 2.6% as on 2QFY10 to 1.1% as on 2QFY11, sequentially they have increased from 0.9% as on 1QFY11. Going forward the asset quality is expected to improve given the post harvest period and festival season. Capital Adequacy MMFSL has a capital adequacy ratio of 16.5% as on Sep 2010 against the requirement of 12%. With the growth being witnessed by the company the management has indicated that they may need to raise capital before second half of FY12. Net Interest Margins continue to grow During the 2QFY11, MMFSL reported margins of 11.5% against 11.1% reported in 2QFY10. Although the yields have reduced mainly on account of the change in disbursement mix, the reduction in cost has offset the decline in yields. Rural Housing Rural housing finance arm of MMFSL reported net profits of `36 million in 2QFY11 against a profits of ` 4 million in 2QFY10 and `11 million in 1QFY11. The loan book has expanded from `725 million in 2QFY10 to `2,110 million in 2QFY11 versus `1,664 million in 1QY11. The management intends to scale this business to the size of `6-10 billion over the next 2-3 years. The average ticket size of loans in this segment is 0.2 mn. 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 2QFY11, which led to a growth of 40% in net interest Income. Considering the traction witnessed in disbursements we have revised our disbursement CAGR for FY10-12 from 21% earlier to 30%. We have revised our earnings estimates by 7% and 9.6% for FY11 and FY12 respectively to factor in higher loan growth and significant improvement in asset quality witnessed by the company. We expect the Net interest income to register a CAGR of 26% during FY0-12 and the earnings to register a growth of 28% during the same period. We recommend BUY on Mahindra and Mahindra financial services ltd for a target price of `765. (3x it s PBV of `255 for FY12E.) 3
Interim Results (` Mn) 2QFY11 2QFY10 % Chng 1QFY11 % Chng Interest Income 4,546.4 3,364.0 3,767.8 Interest expended 1,518.0 1,205.1 1,315.0 Net Interest Income 3,028.4 2,158.9 40.3 2,452.8 23.5 Income from securitisation 149.2 165.8 156.0 Other Income 93.3 95.2 90.1 Operating Income 3,271.0,2419.9 2,699.1 Operating Expenses 1,194.1 790.5 1,046.0 Profit before provisioning 2,076.9 1,629.4 1,653.2 Provision 334.9 595.6 543.0 Profit before taxes 1,741.9 1,033.8 1,110.2 Provisions for taxes 577.1 341.9 368.2 Net Profit 1,164.8 691.9 68.3 742.0 57.0 Equity Share capital 961.4 957.6 960.5 EPS 12.1 7.2 7.7 Source: Company Earnings Summary ` Mn Particulars FY09 FY10 FY11E FY12E Interest Income 12,604.9 14,053.9 18,220.9 23,621.9 Interest expended 5,098.6 5,017.3 7,017.4 9,348.8 Net Interest Income 7,506.3 9,036.6 11,203.5 14,273.0 Income from securitization 1,043.3 1,253.8 1,296.3 1,596.5 Other Income 198.4 380.3 507.4 630.5 Operating Income 8,748.0 10,670.7 13,007.2 16,500.0 Operating Expenses 2,667.8 3,249.8 3,968.3 5,424.9 Pre Provisioning Profits 6,080.2 7,420.9 9,038.9 11,075.0 Provisions & contingencies 2,823.9 2,215.2 2,138.9 2,521.7 Prior period items 0.0-16.8 0.0 0.0 Profit before Taxes 3,256.3 5,188.9 6,900.1 8,553.4 Provisions for taxes 1,111.1 1,761.8 2,346.0 2,908.1 Net Profit 2,145.2 3,427.1 4,554.1 5,645.2 Source: Company, ACMIIL research 4
Sources and Application of Funds `Mn Particulars FY09 FY10 FY11E FY12E Liabilities Capital 957.1 959.8 959.8 959.8 Reserves & Surplus 13,734.5 16,325.8 19,761.0 23,953.1 Networth 14,691.6 17,285.6 20,720.8 24,912.9 Borrowings 52,130.2 64,577.5 84,823.5 108,690.9 Total 66,821.8 81,863.2 105,544.3 133,603.8 Assets Fixed assets 374.4 476.0 615.1 708.2 Investments 1,097.1 2,159.3 2,159.3 2,159.3 Deferred Tax assets 1,787.5 2,069.3 2,069.3 2,069.3 Loans and Advances 68,383.4 83,788.0 108,887.7 139,347.3 Net Current Assets -4,820.6-6,629.4-8,187.2-10,680.3 Total 66,821.8 81,863.2 105,544.3 133,603.8 Source: Company, ACMIIL research Key Ratios FY09 FY10 FY11E FY12E Spreads Cost of Borrowings 9.9% 8.6% 9.4% 9.7% Yield on Advances 17.9% 17.6% 18.2% 18.5% Net Interest Income 8.0% 9.0% 8.8% 8.7% Net interest margins 10.7% 11.3% 11.2% 11.1% Profitability ratios Return On Average Assets (ROAA) 3.3% 4.6% 4.9% 4.7% Return On Average Net worth (ROANW) 15.4% 21.4% 24.0% 24.7% Balance sheet ratios Loan to borrowings ratio (%) 131.2 129.7 128.4 128.2 Debt/Equity Ratio (Times) 3.5 3.7 4.1 4.4 Growth Ratios Borrowings 2.9% 23.9% 31.4% 28.1% Loans 2.9% 22.5% 30.0% 28.0% NII Growth 16.8% 20.4% 24.0% 27.4% Book value 11.2% 17.3% 22.5% 21.4% EPS 20.5% 59.3% 32.9% 24.0% Valuation ratios EPS (`.) 22.4 35.7 47.4 58.8 Book value (`.) 153.5 180.1 210.1 255.1 P/E (X) 29.2 18.3 13.8 11.1 P/BV (X) 4.9 3.8 3.1 2.6 Source: Company, ACMIIL research 5
Notes Institutional Sales: Ravindra Nath, Tel: +91 22 2858 3400 Kirti Bagri, Tel: +91 22 2858 3731 Himanshu Varia, Tel: +91 22 2858 3732 Email: instsales@acm.co.in Institutional Dealing: Email: instdealing@acm.co.in Disclaimer: 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 010607233 (Cash); INF 010607233 (F&O), NSE INB 230607239 (Cash); INF 230607239 (F&O) 6