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Mahindra Finance PDF
Mahindra Finance PDF
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
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.
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.
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.
35,000
30,000
Total Domestic Vehicle Sales (in '000)
25,000
20,000
15,000
10,000
5,000
-
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY16E
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.
50%
Industry Domestic Growth …Near Term Scene
40%
After slugging performance for past two
30% years, the auto industry revived on the
20% back of number of impetus including –
10%
Pent up demand
0%
-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
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.
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.
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.
Fixed MF
Deposits Distribution
Tractors
, 23.0%
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.
Net Profit 27
12,000
AUM Estimated value of Assets financed YTD
Value of assets 10,000
22
financed
8,000
Contracts 37 6,000
4,000
Employees 32 2,000
-
Branches 15
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.
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
40
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
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.
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.
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
67
Mahindra Insurance Brokers Ltd. (MIBL) - Insurance Broking 70
60
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.
Peer Comparison
Though there is no one to one comparison, we have weighed it against related NBFC’s.
Stock Performance
1M Return 6M Return 1 Yr Return 52 Wk High 52 Wk Low
*FY09
MMFSL 2 70 56 402 197
Shriram City Union 0 15 38 550 279
Shriram Transport Finance 11 48 204 585 183
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.
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.
300 225
100 75
0 0 0
Mar…
Apr…
Oct…
May-09
Jun-09
Sep-09
Dec-09
Apr-09
Jul-09
Aug-09
Oct-09
Nov-09
Jan-10
Feb-10
Mar-10
Apr-10
Sep'06
Apr'08
Oct'08
Apr'09
Oct'09
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
Provisions
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
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
Business
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
BUY : >20%
ACCUMULATE : 12-20%
HOLD : 5-12%
REDUCE : <5%
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