April 27, 2011 Result Update KEY DATA Market Cap (INR bn) 79.9 Market Cap (USD mn) 1815.3 52 WK High / Low 913 / 398 Avg Daily Volume (BSE) 83432 Face Value (INR) 10 BSE Sensex 19545 Nifty 5868 BSE Code 532720 NSE Code M&MFIN Reuters Code MMFS.BO Bloomberg Code MMFS IN Shareholding % 2Q 3Q 4Q Promoters 61.0 61.0 57.0 MF/Banks/Indian FIs 7.0 7.0 4.0 FII/ NRIs/ OCBs 26.0 27.0 34.0 Indian Public 6.0 5.0 5.0 Performance Chart Price Performance (%) 3 M 6 M 12 M Absolute 4.6 (3.3) 10.1 Relative (5.7) (11.6) (65.9) Financials (INR mn) FY11 FY12E FY13E NII 13,137 16,564 19,749 PAT 4,632 6,067 7,292 EPS per sh 45 59 71 ABV per sh 236 276 328 Amandeep Goraya Analyst Tel. : 4000 2669 agoraya@finquestonline.com Chintan Mewar Vice President - Research Tel. : 4000 2665 cmewar@finquestonline.com CMP : INR 768 Rating : Sell Target : INR 737 M&M Financial Services (MMFSL) MMFSL reported PAT of INR 1.6 bn in Q4FY11 up by 11.6% YoY from INR 1.4 bn in Q4FY10. The company made disbursement of INR 39.6 bn registering growth of 44.8% YoY in Q4FY11. AUM stood at INR 151.6 bn registering growth of 41% YoY in FY11. MMFSL at present has 547 branches spread across India. The company plans to roll out atleast 85 new branches in next 2 years taking total number of branches to 632 by FY13E. Disbursement growth to come down Disbursements have grown by 62% YoY in FY11 to INR 144 bn. Growth drivers for MMFSL are set in place and are expected to expand business by ~30% annually in next 2 years. MMFSL has signed a partnership with NAVISTAR to foray into heavy commercial vehicles segment. The company expects to finance 3000 to 4000 vehicle through this partnership. MMFSL expects to finance 2nd hand cars sold by Maruti which would help the firm to increase proportion of used vehicle finance in its portfolio. As new rural infrastructure projects are getting commissioned, the firm expects robust demand for used vehicle and construction equipment from semi urban and rural region. Going forward, we expect growth of 30% CAGR in disbursement over FY11E- FY13E. Pressure on spreads but profitability intact Reported gross spread has come down substantially to 12.1% in FY11 as aginst 13% in FY10. Total income was low due to higher proportion of low yielding products in disbursement like car moved up to 33% in FY11 (29% in FY10). Due to base rate regulation and bank borrowing increasing to 57% in FY11 (46% in FY10) cost moved up substantially leading to lower gross spread. Previously MMFSL use to pay for collection charges on securitized portfolio. Now, this cost will be paid by banks who buy securitized portfolio which would nullify the negative impact on securitization income for MMFSL due to base rate regulation. Reported net spread remained almost stable due to lower provision as GNPA has improved to 4% in FY11 as against 6.4% in FY10. Out of the total tractor portfolio, 50% is for non farm use. MMFSL's customer profile has undergone change as professionals like doctors, teachers, engineers etc from rural and semi urban areas are increasingly financing their vehicles through MMFSL. This has lead to lower dependence on farm based customers for MMFSL. These two factors are expected to keep check on asset quality. Currently ATS is ~INR 3 lakh, this is expected to move upto ~INR 7 lakh leading to fall in overhead cost. Going forward, we expect calculated NIM to be 11.3% in FY12E and stabilize at same level in FY13E. Subsidiaries Mahindra Insurance Brokers Ltd is 100% owned subsidiary of MMSFL for auto insurance business. The company is setting up plans to foray into other type of insurance products. Mahindra Rural Housing Finance Ltd is 87.5% owned subsidiary of MMSFL for financing housing loans in rural areas. The company expects ~100% growth in disbursements in FY12E. We expect these two subsidiaries to add value to MMSFL as the business expands into new areas and robust rural growth to drive business growth. We have valued these two subsidiaries at INR 16 per share (1.0x ABV FY13E). Valuation MMFSL is keen to expand its operations in CV financing, construction equipments & second hand vehicle financing. We believe that MMFSL will register growth of ~30% over FY12E- FY13E due to increasing infrastructure projects in rural areas, new tie-ups and high rural penetration. Although, the performance of the company look good on all the parameters, we believe the current valuations are rich and discounts all the above mentioned positives. At CMP, the stock is trading at 2.8x and 2.3x ABV FY12E and FY13E respectively. We value core business MMFSL at INR 721 (2.2x FY13E ABV, 20% discount to Shriram Transport) and arrive at revised target price of INR 737 (includes INR 16 for subsidiaries). We recommend SELL on the stock. FINQUEST research also available on BLOOMBERG FSPL <GO> and REUTERS. For Private Circulation Only
Q4FY11 Results INR million Q4FY11 Q4FY10 % ch YoY Q3FY11 % ch QoQ Income from Operations 5916.3 4636.1 27.6 5203.4 13.7 Interest expenses 1956.2 1240.2 57.7 1812.8 7.9 Net income from Op 3960.0 3395.9 16.6 3390.6 16.8 Securitisation income 238.0 529.0 (55.0) #DIV/0! Net income from Op (ex -securitisation) 3722.0 2866.9 29.8 3390.6 9.8 Other Income 106.7 113.5 (6.0) 96.3 10.8 Operating Income 4066.7 3509.4 15.9 3486.9 16.6 Operating expenses 1482.8 1002.5 1209.4 Staff Cost 469.9 376.0 25.0 310.5 51.4 Depreciation & Amortisation 56.3 28.0 101.1 39.2 43.6 Other Expenses 956.6 598.5 59.8 859.7 11.3 PrepProv Profits 2584.0 2507.0 3.1 2277.5 13.5 Provisions and Write Off 115.1 339.3 (66.1) 259.8 (55.7) Profit after provisions 2468.9 2167.6 69.2 2017.8 69.2 Exceptional item 29.4 0.0 284.9 PBT 2439.5 2167.6 12.5 1732.9 40.8 Tax Expense 874.0 765.3 14.2 574.1 52.2 Net Profit 1565.5 1402.3 11.6 1158.8 35.1 Cost to income Ratio 36.46 28.56 34.68 Disbursment (INR Mn) 39637.0 27380.0 44.8 42390.0 (6.5) Avg Number of Contracts 97265.0 65618.0 48.2 107458.0 (9.5) FY11 FY10 FY09 Spread Analysis Total Inc/ Avg Assets 17.90 19.00 19.10 Interest/ Avg assets 5.80 6.00 6.90 Gross spread 12.10 13.00 12.20 Overheads/Avg assets 4.40 3.90 3.70 Write off & NPA prov/avg Assets 1.40 2.70 3.90 Net Spreads 6.30 6.40 4.60 RoA 4.10 4.10 3.00 RoE 22.00 21.50 15.40 Leverage ratio 3.90 3.70 3.50 NPA trend Gross NPA 5488 6112 6909 Less Provision 4744 5283 4966 Net NPA 744 829 1943 Total Assets (incl prov) 138606 96233 79404 GNPA% 4.0 6.4 8.7 NNPA % 0.6 0.9 2.6 Coverage ratio 86.4 86.4 71.9 2
Funding mix on basis of investor profile Funding mix on basis of instruments AUM Break-up Disbursement Break-up 3
One Year forward Price to ABV trend 4
STANDALONE FINANCIALS Profit and Loss statement FYE March, INR mn FY10 FY11 FY12E FY13E Interest earned 15,307.7 19,739.3 25,756.9 31,177.6 Interest expended 5,017.3 6,602.0 9,192.7 11,428.7 Net interest income 10,290.4 13,137.3 16,564.2 19,748.9 Non-interest income 380.3 387.0 349.7 358.8 Operating expenses 3,249.8 4,932.0 5,852.4 7,158.4 Pre-provisioning profits 7,420.9 8,592.3 11,061.5 12,949.2 Provisions & contingencies 2,215.2 1,567.1 1,869.1 1,900.9 PBT 5,205.7 7,025.2 9,192.4 11,048.3 Income tax, Interest tax 1,761.8 2,393.3 3,125.4 3,756.4 Net profit 3,443.9 4,631.9 6,067.0 7,291.9 Balance Sheet FYE March, INR mn FY10 FY11E FY12E FY13E Cash and Bank balances 2,419.9 2,976.1 2,536.1 2,590.7 Other current assets 80.2 184.3 210.0 239.4 Fixed Assets 476.1 820.2 550.1 601.6 Investments 2,159.3 6,745.5 5,031.5 9,812.6 Loans and advances 87,945.0 124,649.9 149,579.9 179,495.8 Deferred Tax asset 2,069.2 2,167.3 2,167.3 2,167.3 Total Assets 95,149.7 137,543.3 160,075.0 194,907.5 Share Capital 959.8 1,024.5 1,024.5 1,024.5 Options/warrants/others 12.0 20.8 20.8 20.8 Reserves & surplus 16,314.0 23,858.5 28,165.1 33,341.1 Net Worth 17,285.9 24,903.9 29,210.4 34,386.5 Secured Loans 53,259.0 83,006.0 101,682.4 124,560.9 Unsecured Loans 11,318.0 13,744.0 17,867.2 23,227.4 Current Liabilities & provisions 13,286.6 15,889.8 11,315.0 12,732.8 Total liabilities 95,149.5 137,543.7 160,075.0 194,907.5 Ratios FYE March, INR mn FY10 FY11E FY12E FY13E Shares outstanding (mn) 96.0 102.5 102.5 102.5 FDEPS (Rs) 35.9 45.2 59.2 71.2 DPS (Rs) 7.5 10.0 14.7 17.7 Book value (Rs) 180.1 243.1 285.1 335.6 ABV 171.5 235.8 275.9 327.6 Valuation ratios P/E (x) 21.4 17.0 13.0 10.8 P/BV (x) 4.3 3.2 2.7 2.3 P/ABV (x) 4.5 3.3 2.8 2.3 Return Ratios (%) Interest spread 10.0 9.2 9.1 9.3 NIM 12.5 11.6 11.3 11.3 Yield on assets 18.6 17.4 17.6 17.8 Cost of funds 8.6 8.2 8.5 8.6 Cost to income ratio 30.5 36.5 34.6 35.6 RoE 21.5 22.0 22.4 22.9 RoA 4.6 4.6 4.5 4.4 Growth ratios (%) Net interest income 20.4 27.7 26.1 19.2 Total income 22.0 26.7 25.1 18.9 Pre-provisioning profit 22.1 15.8 28.7 17.1 PAT 60.5 34.5 31.0 20.2 Asset quality (%) Gross NPA 6.4 4.0 4.0 3.5 Net NPA ratio 0.9 0.6 0.6 0.4 CAR 18.2 17.0 16.8 15.4 Tier-I ratio 16.1 14.5 14.3 13.2 Recommendation Summary Event Date Price Rating Target Initiating Coverage 01-10-2009 223 Buy 275 Result Update (Q3F10) 22-01-2010 357 Buy 400 Result Update (Q4F10) 23-04-2010 405 Hold 450 Result Update (Q1F11) 29-07-2010 537 Sell 515 Result Update (Q4F11) 27-04-2011 768 Sell 737 5
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