Mahindra & Mahindra Financial Services Ltd - Research Report

 
To get a call back from your Relationship Manager, just give a missed call at +91-9773076000

Private Client Research

Rating

Buy

Sector

NBFC

Company

Mahindra & Mahindra Financial Services Ltd

Reco Price
Rs. 185.00
Price Target (1.5 - 2 Years)
Rs. 400.00
Upside
116.22%

Date

February 12, 2016
Sensex
22986.12
CNX Nifty
6980.95

Exchange

Code

NSE
M&MFIN
BSE
532720

Strong volume growth and favourable monsoon will boost financials.

Leader in countryside vehicles’ finance business:
M&M Financial Services (MMFS) enjoys a leadership position in rural and semi-urban region in the automobile finance business, key beneficiary of rising rural cash flows, strong principals & customized Business Model, diversified product portfolio, diversified liabilities franchise, healthy growth in loan book, healthy credit rating & diversified funding mix, improving asset quality, strong risk management, superior growth in profitability, strong subsidiary growth & contributions, impressive return ratios, well capitalized & operationally efficient NBFC and last but not least, its businesses, are well aligned with the regulator’s guideline.

Customized Business Model:
Around 75% of vehicles financed by the company are commercial vehicles which are used for generating income and the remaining 25% for consumption. Generally, rural people do not have the necessary documents which support their creditworthiness and that is why most of the lending done by local field officers. They have a strong knowledge about that particular region, crops, other activities, customers, etc. and they understand the local language as well. To avoid any kind of fraud, the company interchanges its field and branch officers in every 12-15 months. Moreover, the company has a very strong principal in terms of Loan-To-Value Ratio (LTV Ratio) and tenure of repayment of the loan. Average tenure of the loans is around two years for used vehicles, three years for Cars/UVs and four years for tractors and MHCVs. Further, the company does not restructure installments or the loan. It also doesn’t allow its branches to sanction more than one loan per family and such requests need approval of higher authority. The field officers are provided handheld devices (which have all the information about their clients and link with the branches and central offices to keep record on a real time basis) for the collection of monthly installments from the borrowers. Hence M&M Financial Services has a very strong business model in terms of lending money which is done in customized manner.

Fast sanction procedure:
Banks are expanding their branches in rural and semi urban regions to tap the potential market opportunity and meet the Priority Sector Lending (PSL) target. Generally, banks take 12-15 days for lending. However, M&M Financial Services offers a fast lending procedure of 2 days as compared to 6-7 days by other NBFCs. Its strong principals along with a customized business model and quick loan sanction and disbursements policy with less documentation gives the company an edge over others.

Strong parent support:
M&M Financial Services constructed itself as a strong asset finance company by successfully exploiting its parent’s brand (Mahindra & Mahindra) which is very well recognized in the tractors and utility vehicles market. However, the company has been transforming itself into a diversified player by adding vehicles such as passenger cars, commercial vehicles (CVs), second-hand CVs to its financing portfolio. In the passenger cars segment, MMFS finances a meaningful share of cars manufactured by Maruti, Toyota, Hyundai, Ford and Tata Motors. In recent years, the company has begun financing utility vehicles (UVs) and tractors that compete with its parent’s products.

Return ratios moderate but impressive:
In the present challenging environment where macro and micro economic environments lead to higher stress, MMFS has managed well and kept return ratios healthy. In FY15, it’s Return on Assets (ROA) and Return on Equity (ROE) stood at 2.57% and 16.50% respectively. The company’s rapid business expansion along with growing profitability and its active management of current and future business needs considering the risks in its businesses was the core reason of this achievement.

Stock Data

CMP (Rs)
193.45
Face value (Rs)
2
52 Week Range (Rs)
173.40 - 294.00
Market cap (Rs Crores)
11002.76
Price To Book Value (x)
1.84
P/E Ratio (x)
17.31
EV/EBIDTA (x)
10.20

One Year indexed Stock Performance

M&M Financial Services LtdSensex
Mahindra & Mahindra Financial Services Ltd
Performance (%)
1m
6m
12m
Absolute
-16.13
-24.15
-24.54
Sensex
-6.87
-16.45
-20.20

Shareholders

(in %)
31-Dec
Promoter
52.00
Public
48.00
Others
0
Total
100

+91 22 6639 3000
research@stockaxis.com

 

Industry

The Indian financial sector comprises of banks and financial institutions. Tighter liquidity conditions, stringent prudential norms and regulatory changes have resulted in fewer and stronger NBFCs across the country. The year 2014-15 saw some significant changes in the banking and financial industry:

• After a gap of more than 10 years, RBI awarded bank licenses to two new entities.

• The monetary framework has been changed to 6 reviews per year as compared to 8 earlier.

• The RBI issued norms for payments banks and small banks and initiated a process to issue differentiated licenses. It received 41 applications for payments bank licenses and 72 for small finance bank licenses.

Banks were allowed to undertake Cash Reserve Ratio (CRR)/Statutory Liquidity Ratio (SLR) exemption for the funds raised via infra bonds. Under the Prime Minister led Pradhan Mantri Jan Dhan Yojana, over 130 million bank accounts were opened, helping take financial inclusion significantly forward

Profile

Mahindra & Mahindra Financial Services Limited is an India-based non-banking financial company (NBFC) catering to financing needs in rural and semi-urban areas with 1108 offices across the country. The company provides a range of retail products and services such as financing utility vehicles for commercial & personal use, tractors, small & medium-sized enterprises (SMEs) loans, housing finance and other financial products. The company also offers mutual fund distribution, investments & advisory, fixed deposit schemes and personal loans. Its subsidiaries include Mahindra Insurance Brokers Limited, Mahindra Rural Housing Finance Limited, Mahindra Asset Management Company Limited and Mahindra Trustee Company Private Limited. Through its subsidiary, Mahindra Insurance Brokers Limited, MMFS is also engaged in the business of distributing life and non-life insurance products through tie-ups with various insurance companies.

Profit & Loss Statement:- (Standalone)
(Rs Crores)
Particulars
Mar 13
Mar 14
Mar 15
Mar 16E
Mar 17E
Income:-
  • Operating Income
  • Growth (%)
  • Total Expenditure
  • EBIDTA
  • Margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Exceptional Income / Expenses
  • Profit Before Tax
  • Provision for Tax
  • Tax Rate (%)
  • Profit After Tax
  • Adjusted EPS
  • 4094.99
  • -
  • 1096.58
  • 2998.41
  • 73.22
  • 17.97
  • 3016.38
  • 1670.59
  • 23.66
  • 1322.14
  • 30.52
  • 1352.66
  • 423.75
  • 31.33
  • 928.91
  • 16.47
  • 5275.23
  • 28.82
  • 1531.98
  • 3743.25
  • 70.96
  • 25.33
  • 3768.57
  • 2280.96
  • 26.08
  • 1461.53
  • -
  • 1461.53
  • 496.75
  • 33.99
  • 964.77
  • 16.94
  • 6021.14
  • 14.14
  • 1972.53
  • 4048.61
  • 67.24
  • 39.76
  • 4088.37
  • 2643.00
  • 45.51
  • 1399.87
  • -
  • 1399.87
  • 475.00
  • 33.93
  • 924.87
  • 16.18
  • 6,300.00
  • 4.63
  • 2,150.00
  • 4,150.00
  • 65.87
  • 45.00
  • 4,195.00
  • 3,035.00
  • 57.50
  • 1,102.50
  • -
  • 1,102.50
  • 361.95
  • 32.83
  • 740.55
  • 12.96
  • 6,700.00
  • 6.35
  • 2,050.00
  • 4,650.00
  • 69.40
  • 45.00
  • 4,695.00
  • 3,150.00
  • 68.50
  • 1,476.50
  • -
  • 1,476.50
  • 487.54
  • 33.02
  • 988.96
  • 17.30
Source: Stockaxis Research, Company Data

Valuation

We believe, the company’s strong and thoughtful business model, rising cash flows along with government’s persistent support to the rural region may keep the company operationally efficient and help it grow in terms of loan book.

Moreover, asset growth is driven by increase in field employees/branches, geographic penetration and improvement in employee/branch productivity. The number of employees and branches have grown at a CAGR of 12% and 8.5% over the period from FY10 to FY15.

Company has been doing heavy provisioning since last 2 years where asset quality has not affected much. This should flow back to PAT in next 3 years once they payback to company. These will turnaround for the company once they comply with RBI norms.

Currently company is trading at 2.05x FY 2015 P/ABV which is very low valuation considering the other private banks and its historical valuation of 2.75x P/ABV which is very high compare to its current valuation. Hence even on that front company is trading very cheap.

Even if company trades on its historical valuation of 2.75x P/ABV company has strong upside of 40% from current levels. But we feel once provision done in past flows back to future profit company’s valuation will be rerated. Hence we assign valuation 3.65x P/ABV which indicates the target price of Rs 400.

 

DISCLAIMERS AND DISCLOSURES:

Opulent Investment Adviser Private Limited is registered as an Investment Adviser with SEBI bearing registration Number INA000002462 as per Securities and Exchange Board of India (Investment Advisers) Regulations, 2013. Opulent Investment Adviser Private Limited offer investment advisory services to clients as well as prospects.

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Other disclosures by Opulent Investment Adviser Private Limited and its Research Analyst with reference to the subject company(s) covered in this report-:

Opulent Investment Adviser Private Limited does have any financial interest in the subject company: (NO)

Research Analyst or his/her relative’s have financial interest in the subject company: (NO)

Opulent Investment Adviser Private Limited and Research Analyst or his/her relative’s does have any material conflict of interest in the subject company: (NO)

Research Analyst or his/her relatives have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report: (NO)

The research Analyst has served as officer, director or employee of the subject company: (NO)

Our salespeople and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein.

This report is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person.

This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of the users of stockaxis.com / Opulent Investment Adviser Private Limited.

While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to herein, and we do not warrant its accuracy or completeness.

Opulent Investment Adviser Private Limited, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report.