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Mahindra & Mahindra Financial Services Ltd.
“Riding rural bouyancy”
1743.7 2.0 1743.830 over the next 9 to 12 months. Recovery in cash: Since a significant portion of the collections takes place in cash. Investment Rationale Excellent understanding of rural markets: The main market for tractors being the rural and semi-urban areas.7) 6Mth (13.6 respectively. Valuation & Recommendation 130 120 110 100 90 80 70 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 M&M FIN SER VICES NSES&P CNX NIFTY INDEX Shareholding Pattern as of 30 June 2011 Promoters Holding Institutional (Incl.) Sector Stock Details BSE Code Bloomberg Code Market Cap (Rs.2) 1Yr 5.5x FY’13E Adj.3 and Rs. Mahindra & Mahindra Financial Services Limited (MMFSL) has a pan-India presence mainly in the rural and semi-urban areas. Volume BSE (Monthly) Face Value (Rs) Dividend (FY 11) Shares o/s (Crs) Relative Performance MMFSL(%) NIFTY(%) 140 Mahindra & Mahindra Financial Services Ltd.5) (11.0 P/ABV (x) 3. book value to arrive at a price target of Rs.8% Vishal Jajoo – Sr. The net profit for FY’12E and FY’13E is expected to be Rs.6% 4.4 1Mth 9.53.1 (18. 2011) spread across 24 states and 4 union territories. Research Analyst (+91 22 3926-8136) Email id: vishal.1 10.1% 14.6 We expect the company to post a Net Interest Income of Rs. NHB has taken a 12.wk HI/Lo (Rs) Avg. 647 NBFC 532720 MMFS IN 6729 45 913/590 7233 10.7 483. Strong recall value: The company has a strong brand recall value.Initiating Coverage Recommendation CMP (Rs.5 12.8% 41.554.7% 15.9% 14.1% P/E (x) 18.6% PAT 342. BUY Rs. The EPS for FY’12E and FY’13E should be Rs. the company has not only gathered an excellent understanding of the rural markets but also established a nation-wide network of 559 branches (as on June 30. Significant potential in rural housing finance: The only company in the country to cater exclusively to the housing finance requirements in the rural areas. This provides an upside of 28% from the present levels.4 554.9 (Source: Company. recovery is a specialized job.1522 crore for FY’12E and Rs.6 2.4% 34.0 1313.0 100% 10.6 Growth (%) 59.4 crore and Rs.4 671. Particulars FY'10 FY'11 FY'12E FY'13E Growth (%) 20.5% stake in the company. FII) Corporate Bodies Public & others 57.6 crore for FY’13E.4% 27.com Net interest Income 1029.64.4) Snapshot Incorporated as Maxi Motors Financial Services Limited. along with high levels of acceptance due to the presence of the parent company in the tractor segment.7 1522. The company has deployed significant human resources and invested in technology for effective monitoring of cash collections.2 (1.671. Nirmal Bang Research) 2|Page .3 1.1 13.2% 3.6 crore respectively. We expect the company to trade at 2. The company offers an entire gamut of financial services in the rural and semiurban segments.jajoo@nirmalbang. cr) Free Float (%) 52.7% 21.
and other products like insurance broking and gold loans (on pilot basis). This provides MMFSL a significant competitive advantage over its peers.000 5. rural housing. 2011) spread across 24 states and 4 union territories. These include financing to commercial vehicles. Excellent understanding of the rural markets Mahindra & Mahindra Financial Services Limited (MMFSL) was mainly incorporated to help the parent company.000 6. commercial equipments. 10.000 1.000 4.000 2. The company has a strong brand recall value. the company has not only gathered an excellent understanding of the rural markets but also established a nation-wide network of 559 branches (as on June 30.Initiating Coverage INVESTMENT RATIONALE Mahindra & Mahindra Financial Services Ltd.000 7. The main market for tractors being the rural and semi-urban areas. along with high levels of acceptance due to the presence of the parent company in the tractor segment. Hyundai and Toyota but also adding other financial products to its portfolio which can be very well distributed through its branch network. Mahindra & Mahindra (M&M) generate additional sale of tractors. Complete bouquet of financial services for the rural markets The company has leveraged its understanding of the markets by not only emerging as one of the preferred financiers of other automobile players including Maruti.000 8.000 3.000 9. 3|Page .000 0 FY'07 FY'08 FY'09 FY'10 FY'11 600 550 500 450 400 350 300 Present across the country with an excellent understanding of the rural markets Number of branches (LHS) Number of employees (RHS) Strong recall value due to presence of parent company in the tractor segment The company mainly focuses on the rural and the semi-urban segments.
This helps the company mitigate the risk substantially as far as the weakness in auto sales figure of a particular segment or a particular brand goes. 4|Page . The company has emerged as the second largest financier for Maruti. The portfolio is diversified not only in terms of type of vehicle. on the back of the following elements. CVs.thereby helping the rural population generate higher revenues Higher commodity prices have led to an increase in cost of the automobile leading to higher needs of financing The company has a proper Asset-Liability Management (ALM) system in place such that compared to the assets which have a fixed-interest rate. A break-up of the AUM of the company has been given below in a tabular form: Break-up of AUM Auto/Utility vehicles (M&M) Tractors (M&M) Cars and other (including non M&M vehicles) Commercial vehicles and Construction equipments Pre-owned vehicles and others FY'09 38% 25% 24% 7% 6% FY'10 33% 23% 30% 8% 6% FY'11 31% 23% 31% 9% 6% (Source: Company. However. like. the liabilities to the extent of 80% are also on fixed-interest rate basis. among others but also in terms of OEM(Original Equipment Manufacturer) also. Cars. the company has managed well and shall continue to do so. Tractors. especially under the present higher inflationary-higher interest rate scenario: Interest subvention by the OEMs to increase sales Rural markets are relatively less sensitive to interest rate hikes considering the fact that it is the buoyancy in the cashflows which is more important rather than the increase in costs Increase in Minimum Support Price (MSP).Initiating Coverage Mahindra & Mahindra Financial Services Ltd. Cars contribute a significant portion of its loan portfolio contributing approximately 31% of the loan-book as on date. Diversified product portfolio helps the company sustain the weakness in automobile sales The company has a well-diversified product profile. NB Research) Well-managed under higher interest rates and commodity prices The consecutive rate-hikes by the RBI has definitely increased the cost of funding for a buyer of a vehicle. CEs. the contribution from Mahindra products has reduced significantly. Unlike in the past.
Since a significant portion of the recovery is in the form of cash. on account of it’s years of presence in the rural markets. Example. Significant improvement in NPAs over the years The NPAs of the NBFC have improved significantly over the last few years on the back of buoyancy in rural cashflows and stringent recovery measures adopted by the company. MMFSL. The customer would be issued an acknowledgement of the amount received (in cash) from him. preference. he needs to call up the concerned person at the MMFSL branch. on account of the poor banking habits of the rural population. the centralized system is updated automatically as when the GPRS device with the collection person comes within the connectivity range. the NBFC has adopted various initiatives including measures like: Recruiting local people. It is to be noted that in a country like India where the taste. Recovery of dues remains the “herculean task” MMFSL has been proactive enough in deploying the best form of IT services and a significant portion of human resources in the collection procedure. who would immediately get the amount collected from the customer. In order to keep a tab on the collection method. wherein once the customer makes a payment in cash. The amount for which the acknowledgement has been issued would be updated in the centralized database maintained by the company as soon as the GPRS is/comes under the coverage area. recovery/collection of dues requires a lot of focus as well as 5|Page . demographics change with every district and state. All these measures implemented by the company not only leave any scope for the cash pilferage but also ensures timely collection and efficient monitoring of the receivables. not only helping the company keeping the costs lower but also having an understanding of a particular region Linking the variable-pay component to not just the disbursement but also the collections part Monitoring the collections process through a centralized risk management system Enabled a GPRS-based system. psyche of customer and the collection methodology. if a customer has made some “extra-ordinary gains” during the course of the day by ferrying few more passengers/extra load of goods from the village to the nearby town and wishes to repay the surplus earned towards the repayment of his outstanding dues. recovery continues to be a major issue.Initiating Coverage Mahindra & Mahindra Financial Services Ltd. Improved technology platform to monitor collections The relationship manager/recovery person would immediately reach the customer with a GPRSenabled handheld device. is strategically placed to understand the cycle of rural cashlflows.
The loan is never distributed for the purpose of land acquisition.5% subsdiary. 6|Page . the borrower in a rural area has an utmost intention to pay-off his outstanding dues on time. Instead of giving the loan to the borrower. concrete. No villager would like to tarnish his image so that the local availability of funds gets chocked in future. the proceeds from the housing loan are to be utilized towards enhancement/extension of an existing property. the only other alternative that the borrower has is the local money-lender. among others.Initiating Coverage resources.5% stake in the company is held by the apex authority in housing finance. In a rural area. In most cases. the company makes the payment directly to the vendors of construction material like cement. the company contemplates on the fact that recovery is due to social pressure. Rural Housing Finance – “Joker in the Pack” MMFSL is catering to the housing finance requirements of the rural population through it’s 87. which. NHB (National Housing Bank). the local authority (mainly village panchayats) extends their full co-operation to the team at MRHFL in getting access to the title of the property. Most of the properties/portion of land is in joint names and it is the decision of every family member with regard to mortgage of the property (since lot of emotional values is attached to the same. The balance 12. Rather than adopting the aggressive modes of recovery like repossession. As far as the recovery goes. The mode of maintaining the database is not uniform across the country and changes with every state. Mahindra Rural Housing Finance Limited (MRHFL). the company has got a clear edge in this particular area. This should ideally lead to an increase in the cashflows/earnings helping the borrower to repay the EMI from the increase in the cashflows itself. Therefore. Due to absence of any other player in the organized segment exclusively catering to the rural and semi-urban housing loan requirements. it is the peer-pressure element that works better in rural areas. the company has been proactive enough to identify the same and address these problems in the following manner: Due to the reputation of the company as well as the group. Mahindra & Mahindra Financial Services Ltd. There exist issues with regard to proper documentation and mortgage process of the property due to lack of proper maintenance of data. paints. in most cases happens to be ancestral property). However. This ensures that the funds are utilized for their actual pre-determined purpose only. The issues with regard to repossession of property are much more complex compared to urban areas.
The management has plans to scale it up to all the 25 states and reach a meaningful figure of Rs. 19% Banks for assignment. 7% Assignments . Aggressive expansion plans to provide sustained growth in future: MMFSL has got robust expansion plans for future. The company also has plans to ramp up the existing rural finance operations through its subsidiary. we believe that the company would be able to grow its Assets Under Management (AUM) at a CAGR of +20 per cent over the next 2-3 years. not impacted by any significant spike in any particular mode of funding. 17% 7|Page . a lot of local inquiry goes into the system before actually ending up sanctioning the amount. the housing loan-book size is very small since it is at a nascent stage (operating just out of 8 states in the country). 9% Bank term loan. Considering all these initiatives. 17% On the basis of investor profile Insurance companies & Institutions. 7% Banks. The average loan-book size is very small at around Rs.Initiating Coverage Mahindra & Mahindra Financial Services Ltd. 57% NCDs. The company is not only planning to expand geographically but also offer new products through its existing branches. As a management policy.1-1. Mahindra Rural Housing Finance Limited. Diversified sources of funding MMFSL has kept a diversified base of funding so that the average cost of overall funding remains within limits. The table below highlights the break-up of the sources of funding has been given below: On the basis of Instruments FDs. MMFSL plans to add atleast 50 branches (~10% of the existing network) every year to the existing figure of 570 branches. the company did not rely too much on the securitization income in the past also (restricted the same to a particular limit only). 10% Others. Therefore.5000 crore loan-book by the end of FY’15E. 57% Mutual Funds. we do not expect a significant impact on the account of the latest policy change on securitization.5 lakhs. Like every other loan. At present.
tractors. The provision coverage ratio as on date stands at ~85%.Initiating Coverage Mahindra & Mahindra Financial Services Ltd. the company’s NPAs start declining. cars and utility vehicles to commercial vehicles and construction equipments. This is on account of the fact that the rural population. farm equipments. the recovery process is relatively slow. as a group. Therefore. A significant portion of cash is deployed in purchasing of agri-inputs including products like seeds. the company provides finance for Utility Vehicles (UV). by Q4 of the financial year as and when the sale proceeds from the harvest is realised. After the release of the latest guidelines by the RBI on issuing banking license. M&M has stated its intention to enter the banking space. The only entity in the group catering to the financial services segment Mahindra & Mahindra. among others. Any positive development on those fronts should provide further impetus to the valuation of the company. The company has been conservative in providing for bad loans. Impact of recommendations of Thorat Committee: The Thorat-Committee came out with the following recommendations for NBFCs Increase in Capital Adequacy Ratio Provisioning norms to be similar to banks MMFSL has had a higher capital adequacy ratio in the past and the present recommendations. The company's product portfolio includes a vast range right from finance for two wheelers. covering 24 states and 4 union territories across the country. is present in the financial services segment through MMFSL only. mainly the farming community. a subsidiary of Mahindra & Mahindra Limited was incorporated in January 1991 as Maxi Motors Financial Services Limited. fertilizers. One of India's leading non-banking finance companies. farm equipment. focused on the rural and semi-urban sector. The company is also into rural housing finance and insurance products through dedicated subsidiaries. Usually. Q1 of the financial year registers a relatively sharp increase in the non-performing assets on a quarter-on-quarter basis. if implemented. 8|Page . Considering the fact that not only the group meets all the criteria required as per the guidelines but also the company should emerge as a prime candidate as far as the “financial inclusion” criteria of the Central Bank goes. tends to invest in agricultural operations before the onset of the monsoon. tractors and cars and have the largest network of branches (80% of the districts in India). COMPANY BACKGROUND Mahindra & Mahindra Financial Services Limited (M&M Financial). However. will not lead to any substantial decline in the RoEs.
64. translating into an EPS of Rs.1522 crore for FY’12E and Rs.47. The PAT for FY’11 stood at Rs.830.483.Initiating Coverage RISKS & CONCERNS Mahindra & Mahindra Financial Services Ltd.9 crore for FY’11. The net profit for FY’12E and FY’13E is expected to be Rs.9.554. Any substantial slowdown in the rural economy does not augur well for the company. Significant slowdown in automobile sales Since the company’s fortunes are significantly correlated to the automobile sector. if continues further. Substantial slowdown in the rural economy The company derives a significant portion of its revenues from the rural economy.1973. 9|Page . The EPS for FY’12E should be Rs. This trend. VALUATION AND RECOMMENDATION MMFSL posted an Interest income of Rs.5x FY’13E adjusted book value at Rs. This provides an upside of 28% over the next 9 to 12 months. The Net Interest income for the year stood at Rs.3 and Rs. We expect MMFSL to post a Net Interest Income of Rs. book value. may put the sector as well as the company out of favour amongst the investor community. any significant slowdown in the automobile segment can be detrimental for the company’s performance.6 crore for FY’13E. a jump of 27.4 crore.53.1313. Considering the strong parentage.3x its FY’12E and 2x FY’13E Adj. At the present price. improvement in earnings on the back of buoyancy in rural cashflows.7% y-o-y. Any unexpected policy announcement for the NBFCs The apex authority has had announced a number of policies over the last few months which have a negative impact on the NBFC sector.671. we expect the stock to quote at 2.6 respectively.7 crore.6 crore respectively. registering an increase of 29% yo-y. the stock is trading at 2.1743.4 crore and Rs.
Initiating Coverage Mahindra & Mahindra Financial Services Ltd. 10 | P a g e .
This document is not to be considered as an offer to sell or a solicitation to buy any securities. anyway be responsible for the contents stated herein. and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Nirmal Bang Research. its directors. at best. errors. The information. its affiliates and their employees may from time to time hold positions in securities referred to herein. analysis. represents Nirmal Bang Research opinion and is meant for general information only. This document. Nirmal Bang Research. 11 | P a g e . Note Disclaimer This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). This document is meant for the use of the intended recipient only.Initiating Coverage Mahindra & Mahindra Financial Services Ltd. officers or employees shall not in. or omissions in this connection.
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