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Initiating Coverage

ARIHANT capital markets ltd. Date: 13th Apr 2010

Mahindra Finance Limited ACCUMULATE

CMP: Rs.380 Target Price: 437 Industry: NBFC
Stock Info BSE Group A Shareholding Pattern (As on 31st
Market Capital Rs.3663 cr BSE Code 532720 December, 2009)
Equity Capital Rs. 96.9 cr NSE Symbol M&MFIN Promoters 61.3
Avg Trading Vol. 72398 (Qtly) Bloomberg MMFS IN Domestic Institutions 7.9
52 WK High/Low 402/198 Reuters MMFS.BO Foreign 26.9
Face Value Rs. 10 BSE Sensex 17933 Corporate 0.6
NSE Nifty 5362 Public & Others 3.3

Investment Criteria
 Special Business Knowledge – Mahindra Finance’s (MMFSL’s) technique of credit evaluation, business generation, loan
sanction and collection, makes its business model niche. This model has helped it sustain high margins while containing
the risks involved. Developed over the period, this technique cannot be not easily adopted by other financial institutions.
This reduces the threat of direct competition although indirect competition from PSU banks, which now plan to focus on
the rural segment, would remain.
 Well Established Business with Growth Potential – The aim of MMFSL is to become one of the top rural finance
brands and this is very much achievable given the potential opportunity presented by the improving prospects of rural
economy. This would be supported by the geographically well established wide network of MMFSL and strategic plans of
further expansion. The improving prospect of the auto sector is also highly beneficial with an encouraging trend of
increasing rural sales.
 Cushioned with High Margin Business, High Coverage and Adequate Capital – Catering to a high risk business the
yields earned by MMFSL are also high. Better credit rating and efficient resource management keeps the cost of
borrowings in check, thereby resulting in healthy margins. For FY10E we expect the spread and margins to be about 9%
and 12% respectively. Aggressive provisioning adopted and adequate capital adequacy ratio provides a much needed
comfort for the high risk it carries.
 Financial Performance Expected to be Encouraging – Growing loans at a CAGR of 58% from FY02-07, the global
crisis curtailed the same to 32% for FY04-09. However with signs of revival of economy we expect the loans to grow at a
CAGR of 19% and the bottom line to expand by 26% over the period of FY09-FY12E. Despite pressures, margins are
not expected to drop significantly as the Company has the ability to pass it on to the customers to a reasonable extent.
 Asset Quality Strained But Controlled – Given the high risk nature of rural and auto lendings, the asset quality risk
remains for MMFSL. Increasing over the years, the GNPA peaked in 2009 with the dual impact of global crisis and
monsoon failure when it reached over 10%. The strain is expected to peak off and presently the same has reduced and
stood at 8.7% in Q310. The Co has set up various check to tab the asset quality including use of IT. However with threat
of stimulus pullback, we expect have built in some strain till FY12E. A consequtive monsoon failure or slower than
expected revival of economy will remain to be key risk.
Rs in Cr FY09 FY10E FY11E FY12E
 Valuation – Established business with good growth
prospects, cushion for risks and M&M patronage make
MMFSL a good investment bet. Improving prospects of Net Interest Income 855 991 1161 1341
rural segment and auto industry as well as Cos. plans for Operating profits 608 726 859 977
expansions and diversification, improves its future Net Profit 215 321 369 430
prospects. Concerns would be consecutive poor monsoon in NIM (% )(calculated) 12.4 13.0 12.9 12.5
FY11 and competition from increasing rural focus of PSU
Gross NPAs (%) 8.7 8.7 8.9 8.8
banks. At CMP of Rs 378 the stock is trading at 1.8x of
FY11E P/BV and 9.9x P/E. Given the historical and peer Net NPAs (%) 2.4 2.2 2.1 2.0
comparison we value the stock at 2.1 times the book value EPS 22 34 39 45
of FY11E and arrive at a price target of Rs 437 over a period RoA (%) 3.0 4.0 3.8 3.8
of 12 months giving a potential upside of 15%. We RoAE (%) 15.4 20.2 19.9 19.9
recommend an “ACCUMULATE” on the stock and would PE (x) 16.9 11.3 9.9 8.5
revisit our assumptions post the FY10 results.
PBV (x) 2.5 2.1 1.8 1.6

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Initiating Coverage

Special Business Knowledge To Service Perceived High Risk Customers

MMFSL drove into the rural and semi-urban India essentially to

finance the vehicles from M&M stable (tractors and SUVs) which
 Rural and Semi-Urban India Focus
were the predominant vehicles used in this segment. This was mainly  Set between a bank and Money lender
done to overcome the unavailability of finance and promote sales.  Physical Presence in villages
Over the years it expanded in the same premise to offer a range of  Documentation-free Relationship-
financial products and services. MMFSL's customer base largely
includes small entrepreneurs or self-employed individuals such as based Model
transport operators, taxi operators and farmers.  Comprehensive Follow up and
MMFSL is set between a bank and local money lender. It operates
flexibly and speedily like a money lender while offering much > flexible and
competitive rates. The Company follows a unique business model for generating speedy than
business, sanctioning loan and its collection. The main part is the credit Banks - lesser
evaluation which considers customer’s capability, limitation, business documentation
background and cash flows.
> competitive
 The company does not follow a DSA model and business is generated by than Money
the employees. lenders -
Lower rates
 Products are tailored to suit affordability and cashflow
 The customer facing employees are locally recruited and maintain direct MMFSL
contacts with the existing and prospective customers. Local
 Variable portion of salary is connected to collection rather than employees
like money
business. lender
 The loan approval process is simple, speedy and flexible considering the
low literacy and poor banking habits of the customers. On an average the
loans are approved within just two days.
 MIS and follow up is direct and comprehensive like banks
 Not more than one loan extended to a single person
 The loan to value is about 70%

Over the years the company has gathered in-depth knowledge and understanding of the dynamics of the rural and semi-urban
areas. It has also built strong relationship with its customers while developing close association with vehicle dealers too. Apart
from this “Mahindra” brand is a known and trusted name in the rural and semi-urban India which allows the Company easy
acceptance and trust. Goal of MMFSL is to become one of the top rural finance brands.

Improving Rural Prospects –

70% of India’s population resides in rural areas, accounting for The rural opportunity –Huge population,
64% for the expenditure and a third of country’s savings.
According to a study by the Rural Marketing Association of Structural changes, shift to non food spending,
India (RMAI), the rural and small town economy accounts for increase in employment opportunities/ income,
60% of India's income. It’s obvious that India’s next phase of increased focus on the segment by Govt
growth lies in urbanisation and development of these areas. In
fact, as per Mckinsey, despite rising urbanisation, 63% of
population will continue to live in the rural areas even in 2025.

Demographic classification Urban Rural Total % of households

Top 20 cities Other cities Rural
Rich ( income greater than Rs owning products (2008)
4.8 1.3 6.1
1 m per annum) Car 23 5 3
Well off (income greater than Bicycle 37 61 69
29.5 27.4 56.9
Rs 0.5 m per annum) Colour TV 68 47 17
Total 34.3 28.7 63.0 AC 5 3 0
% of total 54.4% 45.6% Refrigerator 63 34 8
Source – Ministry of Communications & Computer 8 3 1
Information Technology, India
Source – Mint

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Initiating Coverage

The rural focus is not only due to size but also due to the
changing profile of villagers and growth potential in Income Distribution
income and consumption. Improved minimum support
price and alternative employment opportunity has resulted
in increased share of rural contribution in the country’s Urban
GDP. It is known that the under leveraged and savings Rural
oriented rural Indian economy remained unscathed by the
recent global slowdown. Infact the rural consumer market,
which grew 25% in 2008 when demand in urban areas
Source – Business Today
slowed, is expected to reach US$ 425 billion in 2010-
11(nearly double of 2004-05 size), according to a white
paper prepared by CII-Technopak. However still
agriculture is an important occupation there and erratic
monsoon has adversely affected the area and will continue to do so in future.

Though the some of the reasons for the growing impetus on rural India may be temporary like agriculture waiver, there are
many permanent ones also like rural development thrust of Govt through focus on agriculture, agricultural credit, rural areas
and rural spending. The Union Budget for 2009-10 has hiked the allocation for the rural development by 45% through its
various initiatives like NREGA, Bharat Nirman etc. Even RBI is keenly pursuing financial inclusion. While Govt is trying to
improve social measures like literacy, unemployment and poverty; companies are trying to tap the potent consumption
demand emanating there from. Nonetheless rural infrastructure is still far behind and technology is also distant which increase
the cost of transactions.

Improving Demand from Auto Segment

…..Long Term Outlook Growing working population,

The automobile industry in India happens to be the ninth largest in the increased access to credit, better
world and has become one of the top five exporters of automobiles. It will credit products, upward moving
cross the 10 million unit mark in the current year. And going by the income levels, high pace of
‘Automotive Mission Plan 2016’ of the Government, at a CAGR of 16%, urbanisation and improving
the total sales is expected to be near 28.8 million units by 2016. infrastructure thrust – positives for
auto industry

Total Domestic Vehicle Sales (in '000)
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY16E

Source –Automotive Mission Plan; Arihant Research

India is on every major global automobile player's roadmap. With growing working population, increased access to credit,
better credit products, upward moving income levels, high pace of urbanisation and improving infrastructure thrust - auto
industry is looking up.

Rural India vehicle density is 2.3% and improving rural prospects make it a focal agenda for the auto companies, especially the
small cars, two wheeler and utility vehicles. The improving roads and infrastructure also improve the prospects of demand.
The demand for farm equipment vehicle is also bound to rise with these vehicles finding alternative use in construction and
other non-agricultural activities like haulage, trailer applications or excavations. The tractor penetration level in India is very
low as compared to the world standards. Also the penetration levels are also not uniform throughout the country. While the
northern region is now almost saturated in terms of new tractor sales, the southern region is still under penetrated. This points
out to the potent growth lying to be tapped. In this background, given already high penetration in urban markets, rural India
offers big opportunity to the industry. Infact it is expected that Maruti’s rural sales which contributed only 3.5% two years
back would contribute 16.5% to the total sales in FY10.

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Initiating Coverage

Industry Domestic Growth …Near Term Scene
After slugging performance for past two
30% years, the auto industry revived on the
20% back of number of impetus including –
 Pent up demand
-10%  Improving Interest rate scenario
-20%  Easy access to Finance
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4  Stimulus by Govt
 New Launches
FY06 FY07 FY08 FY09  Lower fuel prices
Source: M&M

The vigor of this demand has led us to believe that 400,000

a hike in interest rates on vehicle loans will have
little impact on sales, even though 60-70% of car 300,000
purchases and 50% of two-wheeler sales are
financed through credit. 200,000
Increasing Tractor Production
However there was still a long way to go before the
high sales figures of 2007 are reached. Few
impending concerns are –
 rising input costs, freeing oil prices
 monsoon failure
Source: M&M
 slower than expected growth of economy
 slowdown and hindrances in the infrastructure development of rural and semi urban areas
 Stimulus pullback earlier than warranted

….Creates Credit Opportunities for MMFSL

Data suggests that there is a high demand of credit in the villages. The improved economic prospects in general and auto
sector in particular will create a suitable premise for companies like MMFSL. Company has created a bunch of products to
serve the most common credit needs of rural Indians. It has network and niche model to serve its special customer profile.
Also being an early entrant, it is better placed to tap the upcoming opportunities.

….With Limited Threat Of Competition

Improving rural prospects is drawing attention of companies as well as

financial institutions like banks. However tapping this potent demand will Though focus is shifting towards
not be easy for institutions like bank as servicing rural Indians consumers is rural India, servicing the
a different ballgame given their traditional background, literacy levels and population there needs a
micro demands. It is not surprising that only 31% of the adult rural specialised business model with
population has access to institutionalized credit while the rest depend risk aversion techniques which
money lenders. As per surveys, 26% of rural India’s chief wage earners cannot be built over a short time
(CWEs) are illiterate compared with 8% in urban India. 7% of rural CWEs
are graduates compared with 29% in urban India.
creating entry barriers

The business model of MMFSL has been established over decades and is difficult to replicate in a short time. The business is
set on relationship based model which is a key to service the targeted customer profile. The documentation formality of banks
makes the process less flexible and time consuming. There are no salary slips, no profit and loss statement, no IT returns and
no post dated cheques. Hence it is not easy for them to tap these customers, judge their credit worthiness and collect the dues.
Also banks usually follow a DSA model where the skills and commitment cannot be assured.

Nonetheless the vast network of PSU banks, established customer profile, perceived dependability and most importantly the
low interest rates offered – all of this can be difficult to mitigate. However deeper banking penetration in rural India will create
a bigger market and can be a positive for the creating and tapping the potent demand.

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Initiating Coverage

Systematically Diversifying - Range of Offerings

MMFSL was formed mainly to overcome the unavailability of finance in rural areas and promote sales of Mahindra vehicles.
Mahindra group has always been in a constant state of afflux and in same flow MMFSL also later broadened its prospects to
include non-Mahindra vehicles, which now forms ~60% of its total financing, and a range of other products. This allows it to
offer a bunch of financial solutions to its customers. The wide network of more than 440 branches and relationship with more
than 11 lakhs customers allows it a deeper reach and potential for cross selling. With Mahindra brand being a household name
in rural India due to tractors, the same trust gets extended to MMFSL.

Over the years, MMFSL has been figuring out the rural and semi-urban mindset and perceiving their demands and accordingly
introducing newer products and services to its stable. Starting from M&M vehicles with one branch in Mumbai, over one and
a half decade the firm has grown to multi products with more than 440 branches.

New additions planned to the bouquet includes gold loans, used vehicle financing, and medium to heavy commercial vehicle
financing in construction sector. MMFSL offers loans for new vehicles to mainly small truck operators owning less than two
vehicles. The used vehicle foray is at conceptual stage and would take some time to materialise as the company is developing a
different model to tap this segment.

Asset Break up of AUM

Finance Cars, 28.
0% Others,
Personal CV, 9.0 5.0%
Gold Loans Loans %

Fixed MF
Deposits Distribution
, 23.0%

Housing Insurance Auto, 35

Finance Broking .0%

Consistent Business Growth Expected to Resume

Starting only in 1991, MMFSL has grown rapidly since early 2000’s and Consistent growth as since
thereafter maintained a consistent growth. Over FY02-07 its loan assets grew inception is expected to resume
at a CAGR of 58% after which due to global crisis the Company slowed with recovery in economy.
down to avoid increasing defaults. A glimpse of performance over past five Increased network will also help.
years including period of slowdown can be seen in the chart below. We expect the loans to grow at a
CAGR of 21% and the bottom line
Over the past three years its loan assets have grown at a CAGR of 9% with to expand by 33% over the period
the topline and bottomline growth of CAGR 28% and 27% respectively.
With general improvement in economy and in particular the vehicle industry
of FY09-FY12E.
as well as rural segment, the growth prospects are expected to improve. Apart
from improving economy, we expect that the growth will be supported by the strategic increase in its network as well as
product profile. Securitisation will continue at same pace or may even reduce going forward as the Co looks to expand its
balance sheet. At present it has an extensive scale with approximately 443 branches covering more than 90% districts in India
along with relationship with nearly 1800 dealers. We expect the loans to grow at a CAGR of 19% and the bottom line to
expand by 27% over the period of FY09-FY12E.

MMFSL comes in handy for auto companies with little presence and network in India and rural and semi urban areas in
particular. The company has already got into tie-ups with car makers like General Motors and Maruti to provide finance for
their vehicles. The financial inclusion thrust by RBI and Govt will help in increasing the credit prospects of rural Indians and
will allow MMFSL to cross sell its products more effectively. At present its non-auto business forms just 5% of its total AUM
while we expect it to increase to about 10% in coming few years.

ARIHANT capital markets ltd 5

Initiating Coverage

Net Profit 27
AUM Estimated value of Assets financed YTD
Value of assets 10,000

Contracts 37 6,000
Employees 32 2,000
Branches 15

CAGR Growth -since 2004 (%) 20 40

Asset Quality Under Stress But Guarded With Aggressive Provisioning

 95% secured loans
Biggest challenge in extending loans to rural section is assessing the credit  Comprehensive follow-up
worthiness given the near absence of traditional documentation proof. Therefore  Provisioning at a faster rate
banks hesitate to extend loans. However this presents a viable opportunity to and hence high coverage
MMFSL. With proven credit assessment technique and comprehensive follow-up,
the risk is contained. Faulty credit assessment is covered up with efficient collection
 Rural economies stable
practice which is personally done by the employee who generates the respective with alternative earning
loan, for first few months. Employees being locals are regularly in touch with the sources
borrowers building and maintaining relationship and regularly assessing the asset  Eventual loss < 2%
quality. NPA’s are also low as the products sold are customised on the basis of
assessed cash flow of customer.
300 25
The provisioning and NPA recognition norms of MMFSL Net NPA Coverage Net NPA to NW
are very stringent when compared to the regulatory 250 20
requirements of RBI. With 95% of the loans being secured,
all outstanding above 24 months are fully provided even 15
though the RBI requires a 50% provision after 54 months. 150
Networth to net NPA cushion is improving and is expected 10
to further improve over the period of projection in line with 100
economic condition.
The gross NPA of MMFSL has been increasing over the
0 0
years and rose to levels of more than 10% in the third
(Rs Cr) FY06 FY07 FY08 FY09 FY10 FY11E FY12E
quarter of FY09. The evident slowdown in the economy in
general and auto industry in particular, after the global crisis
led to a slowdown in advances and increase in defaults. To add to the
woes was the monsoon failure and its resulting impact on the rural 10
Gr. NPA %
India. Evidently the major defaults came from the tractor segment.
However Company had anticipated worse situation. But due to loan 8
8.7 8.8
waiver, increase in Minimum Support Price, NREGA schemes, alternate 6
use of tractors as construction equipment, resorting to liquidation of
gold assets etc, the defaults were controlled. 4
GNPA as at end of December 2009 stood at 8.7% and the Company 2
expects it to remain at this level for FY10. The Company has been 0
steadily increasing its provision coverage and from 57% in FY07 it has
increased to 75%. This is expected to increase further and as per our FY06 FY07 FY08 FY09 FY10 FY11E FY12E
estimates if there is no further major deterioration in asset quality, the
same will increase to 78% by FY12E. As per the Company historically the eventual write-off has been less than 2%.

Apart from slower economic revival, a second consecutive monsoon failure in the current year may definitely put pressure on
the asset quality. This would remain to be a potential downside risk to our projections.

ARIHANT capital markets ltd 6

Initiating Coverage

Diverse Sources of Funds With Competitive Cost

Fund Mix Instrument-wise
Majority of the resource is generated by the Company from banks and
mutual fund which together form more than 80% of the total CPs 1
borrowings. Instrument wise bank term loans (40%) and bonds (35%)
form chunk of the borrowing kit. There is no financial support of the
parent group Mahindra and around 85% to 90% of the borrowings are FD's 4
secured in nature. The Company has no foreign currency loans.

MMFSL follows a conservative ALM policy and is mostly in sync. In the Securitisation 20
falling interest rate however it had a positive ALM as it increased its
over one year borrowings a low rates to nearly 85% while only 30% of
Bonds/NCD's 35
its advances were receivable within one year. Currently the gap has been
reduced with nearly 75% of the borrowing repayable over one year.
Bank Term
Fixed deposit acceptance which was discontinued in April 2005 were re- Loans
started in January 2009. Overall, MMFSL still has substantial headroom
to further raise resources. 0 20 40 60

….Cost Of Funds Controlled

The current average cost of borrowing is at around 9%. Judicious liability management along with good credit rating and
securitization allows MMFSL to control its funding cost. Given the inflation and tightening in near future we have estimated
the same to increase during our projection period.

Brickwork Ratings has assigned BWR AA+ – The rating takes into account MMFSL’s business model which has clear focus on
untapped rural/semi-urban markets, proven track record in asset financing, wide network of field staff across 25 states, well
diversified portfolio, high capital adequacy and backing of the parent company Mahindra & Mahindra Ltd. (M&M). The rating
is however constrained by high NPA of the company.

CRISIL has reaffirmed its ratings at ‘AA-/FAA/Stable/P1+’ – The ratings factor in the support that Mahindra Finance receives
from its parent, Mahindra & Mahindra Ltd, healthy capital position, stable and diversified resource base, and substantial
unutilised bank lines giving flexibility to raise resources at competitive costs and high yields. However CRISIL believes that the
overall credit losses in Mahindra Finance’s portfolio may increase as asset quality continues to be under stress.

Healthy Margins Sustainable

Yields for funding rural demands have generally been higher considering the risk factors. Average yield on advances for
MMFSL comes to approx 18.5% thereby earning a decent spread of about 9.5% and hence a high net interest margin. This is
much above the margins earned by the banking sector. Despite hardening of interest rates we expect the margins to remain
stable though with a bit of downward bias as the Company has the ability to pass on the increase to its customers to a
reasonable extent. However with increased competition from banks and other NBFC’s, the margins may face pressure going
forward. With 100% fixed lending – in case the rates rise, the outstanding book will pull down yields and hence margins also.

Securitisation Benefit

Tractors financed by MMFSL classify as priority sector lending for banks. Banks seek these loans at attractive values, allowing
MMFSL to encash some of the loan originations and use the funds for further lending. This helps in improving the NIM by
lowering the cost of funds as well as also helps in managing ALM. The securitisation is in the nature of direct bilateral
assignment and as per its internal policy, MMFSL securities not more than 20% of its new loans generated during the year and
at present the total outstanding is a little over Rs 1000 cr.

Capital Cushion

The Company, being a NBFC, is required to maintain a CAR of more than 12% at any given time. By end of December 2009,
its capital position was healthy with Tier-I capital adequacy ratio (CAR) at 16.8% and overall CAR at 19.4%. The debt to
equity ratio is at 3.6 times. Company came out with IPO in 2006 at a premium of Rs 180/share after which the next equity
dilution was in February 2008 through 11.2% preferential issue to TPG Axon Capital and Standard Chartered Private
Equity(SCPE) at Rs 380/share resulting in a 13.4% dilution. TPG however moved out recently still leaving some serious long
term investors like Copa Cabana, SCPE, and Tree Line Asia Master etc. The company is not likely to go for further equity
dilution in near future.

ARIHANT capital markets ltd 7

Initiating Coverage

Patronage of/to M&M

MMFSL finances around 31% of M&M’s utility vehicle and light commercial vehicle while about 24% of tractor sales. All this
forms about 60% of its disbursements. Though this is much below the 100% financing that it started with, still a substantial
amount of financing for M&M comes from MMFSL making it strategically important for the parent. On the other hand, the
Company gets to leverage on the Mahindra brand.

Subsidiaries - 80 69
Mahindra Insurance Brokers Ltd. (MIBL) - Insurance Broking 70
Incorporated in 2005, MIBL undertakes direct insurance broking 50 38
business, both in the Life and Non-Life insurance segments with a 40
focus on Retail and Commercial lines of businesses. Its turnover as well 30 20 18
as profit has been growing at nearly 40% CAGR since its inception. 20
However employee retention is a big problem given the fact the 10
business requires learned employees with special qualification. PAT for 0
9M10 was Rs 8.6 cr forming less than 5% of the standalone profit of Net Total PBT PAT No of
MMFSL. premium Income customers

Mahindra Rural Housing Finance Ltd. - Housing Finance Business 3- Yr CAGR Insurance Business
This subsidiary came up in 2008, to tap the potential housing demand in the rural and semi-urban areas. Owning a house
provides significant economic security and dignity in society in India and being a huge investment in monetary terms, the
demand for credit is also big. But the same is not met due to the strict lending covenants of banks on one side and high
interest rate of money lenders on the other. Hence this segment can turn into a compelling opportunity for MMFSL. The Co.
owns 87.5% in the subsidiary with the remaining 12.5% held by NHB (National Housing Board).

At present the scale is small and the net profit contribution at present is not even 0.5% of the total profits. The outstanding
loan sanctioned till December 2009 stood at Rs 119 cr. Dynamics of such loans is again different for rural and semi urban
areas. Housing loans in rural areas are necessarily construction loans and at times take over one year to clear due to difficulty in
getting clear title of land, documentation deficiency, language barrier etc. Spread over a period of five years, the defaults are
quite low. At present only 40-50 branches of the company is catering to this segment but plans are in vogue to expand the
same in future to a larger extent.

Mahindra InSource – Manpower Outsourcing arm of Mahindra

Formed recently, MMFSL has transferred nearly 10% of its employees to this subsidiary. Employees are now outsourced from
here and retained on professional fees. Done for clerical level employees, this saves hassles like appraisal and promotion as
well as charges like PF and other contributions.

Peer Comparison
Though there is no one to one comparison, we have weighed it against related NBFC’s.

Rs in Cr Business CMP Market Average Average Debt to Gross

(09/04/10) Cap Networth Loans Assets Equity NPA%
MMFSL Predominant auto 377 3,611 1,671 7,490 8,033 3.7 8.7
Shriram City Union General Finance 456 2,095 802 4,223* 4,101 6.2* 2.43
Shriram Transport Used Vehicle 550 12,347 2,889 20,109 24,782 7.3 2.4

Rs in Cr PE (x) P/BV RoA RoE PAT 9M10 PATM% (9M10)

MMFSL 12 2.0 3.9 17.5 202 19
Shriram City Union 12 2.5 3.6 23.6 149 19
Shriram Transport Finance 15 3.7 3.1 29.3 609 19

Stock Performance
1M Return 6M Return 1 Yr Return 52 Wk High 52 Wk Low
MMFSL 2 70 56 402 197
Shriram City Union 0 15 38 550 279
Shriram Transport Finance 11 48 204 585 183

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Initiating Coverage

IT Initiative
Co IT initiatives are encouraging. All the branches of MMFSL are connected giving real time status of business. Apart from
this, the very innovative hand-held devices are used for issuing on-the-spot receipt for collection which are in turn connected
on a real time basis to its nearest branch which helps in better servicing of customers as well as helps to control the related cash
handling risk.

Strong Management
A dependable and well experienced team heads the company with Chairman Mr. Bharat Doshi and Managing Director Mr
Ramesh Iyer. The Co has very well represented Board of Directors which includes the likes of Mr. Pawan Goenka, Mr. M G
Bhide, Mr M.B.N. Rao etc. Such a strong team assures of a fortified corporate governance also.

About Mahindra and Mahindra Finance Limited

Mahindra & Mahindra Financial Services Limited (MMFSL) is one of India’s leading deposit-taking non-banking finance
companies focused on the rural and semi-urban sectors. Engaged in retail segment, it primarily finances auto loans of M&M as
well as non-M&M brands (UVs, tractors, CV’s and cars) while also financing personal loans and gold loans. Company carries
out mutual fund distribution, insurance broking and housing finance. MMFSL is a subsidiary of Mahindra & Mahindra Limited
(60% holding), a leading tractor and UV manufacturer with more than 60 years’ experience in the Indian market. Currently,
MMFSL has a network of 443 branches and about 4500 employees. The company has a presence in more than 90% of the
country’s districts and has disbursed Rs 21,000 crore since its inception.

600 PBV=1.2 PBV=1.7 PBV=2.2 450 6000

500 375

400 300 4000

300 225

200 150 MMFSL Nifty 2000

100 75

0 0 0













Reported Results For 9M FY10

Rs in Cr 9M 10 9M 09
Interest Income 1,067 975 9%  The revival of economy and auto sector growth in 2010, helped
MMFSL comeback after last two years slowdown.
Interest Expense 378 383 -1%
Net Interest Income 689 593 16%  Co. posted strong number for the nine months ended December
Other Income 2009 due to lower base effect. The disbursement grew by ~23%, loan
27 11 132%
assets grew by 11% and AUM by 16% on a YoY basis.
Operating Income 716 604 19%
Operating Expense 225 203 11%  Improved cost of funds helped in increase in spreads from 11% to
Employee Expense 90 87 4%
11.7%. Along with this lower credit cost helped in net spread improvement
from 2.9% to 4.8%.
Other 134 116 16%
Operating Profit 491 402 22%  YoY Gross NPA improved from 10.1% to 8.7% and the coverage
improved from 65% to 75%.
188 237 -21%
Profit Before Tax 304 165 84%  Branch network was reinstated to 442 and the net value of assets
Tax Provisions 101 59 73% financed improved from Rs 4,843 cr to Rs 6,177 cr.
Profit after Tax 202 106 90%
EPS (Rs) 21.2 11.2

ARIHANT capital markets ltd 9

Initiating Coverage

Annual Standalone Financials

Income Statement Statement of Affairs
Year to 31st March As on 31st March (Rs.
(Rs. Cr) FY09 FY10E FY11E FY12E Cr) FY09 FY10E FY11E FY12E
Interest Income 1,365 1,512 1,803 2,137 Capital 97 97 97 97
Interest Expenses 510 519 643 796 Reserves & Surplus 1,372 1,372 1,614 1,894
Net Interest Income 855 992 1,161 1,341 Networth 1,469 1,469 1,712 1,991
- growth % 14 16 17 16 Borrowings 5,213 5,213 6,187 7,489
Other Income 20 30 45 62 - growth % 3 19 21
Operating Income 875 1,022 1,205 1,403 Other liabilities &
provisions 762 762 849 984
- growth % 13 17 18 16
Total Liabilities 7,444 7,444 8,748 10,464
Operating Expenses 267 295 346 426
- Staff Cost 117 126 139 175
- Other Expenses 149 169 207 252
Cash 276 276 260 312
Gross Profits 608 727 859 977
Advances 6799 6799 8035 9601
- growth % 17 20 18 14
- growth % 3 18 19
Provisions 282 242 300 326
Investments 110 110 157 209
Profit Before Taxes 326 486 559 651
Fixed assets 37 37 42 50
Taxes 111 165 190 221
Other assets 222 222 255 292
Profit After Taxes 215 320 369 430
Total Assets 7,444 7,444 8,748 10,464
- growth % 21 49 15 16

Ratio Analysis
FY09 FY10E FY11E FY12E
Spread analysis (%)
Ratio Analysis Average Yield on Advances 18.8 18.9 19.0 19.0
FY09 FY10E FY11E FY12E Average cost of Funds 9.9 9.1 9.4 9.7
Basic Ratio (Rs.) Interest Spread 8.9 9.8 9.6 9.3
EPS 22 34 39 45 Net Interest Margin 12.4 13.0 12.9 12.5
Book Value per share 153 179 208 242
Dividend per share 5.5 7.0 8.0 9.0 Efficiency Indicator (%)
Dividend Yield 1.4 1.8 2.1 2.4 Cost to Income 30.5 28.9 28.7 30.4
Asset per Employee ( Rs Cr) 1.6 1.8 2.2 2.4
Asset Quality (%) Profit per Employee ( Rs lacs) 4.5 6.7 7.7 8.3
Gross NPAs 8.7 8.7 8.9 8.8
Net NPAs 2.4 2.2 2.1 2.0 Return Ratios
NPA Coverage 71.9 74.3 76.0 76.9 Return on Avg. Net Worth 15.4 20.2 20.0 20.0
Return on Average Assets 3.0 4.0 3.8 3.8
Performance (%)
Operating profit margin Valuation ratios (x)
(%) 44.6 48.1 47.7 45.7 P/E 16.9 11.3 9.9 8.5
Net profit margin (%) 15.7 21.2 20.5 20.1 P/BV 2.5 2.1 1.8 1.6
Net Int. Inc/Total
Income 61.7 64.4 62.8 61.0
Other Income/Expense 7.4 10.1 12.9 14.7
NII/ Average Total
Assets 11.8 12.2 12.1 11.7
Operating profit/Avg
Total Assets 8.4 9.0 8.9 8.5
Net Profit/Avg Total
Assets 3.0 4.0 3.8 3.8
Asset Growth 6.0 17.5 19.6 18.6

ARIHANT capital markets ltd 10

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