9_mm financial serv oct 14

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Mahindra & Mahindra Financial Services

Sanity in performance but environment remains volatile

October 22, 2014

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware th

the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer

to

important

disclosures

and

disclaimers

at

the

end

of

the

report

Pritesh Bumb

[email protected]

+91‐

22‐

66322232

Rating Reduce

Price Rs277

Target Price Rs255

Implied Upside ‐7.9%

Sensex 26,787

Nifty 7,996

(Prices as on October 22, 2014)

Trading data

Market Cap. (Rs bn) 156.0

Shares o/s (m) 563.5

3M Avg. Daily value (Rs m) 916.4

Major shareholders

Promoters 52.06%

Foreign 41.52%

Domestic Inst. 1.09%

Public & Other 5.33%

Stock Performance

(%)

1M

6M

12M

Absolute (1.5) 13.0 2.6

Relative 0.0 (4.7) (25.8)

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2015 16.0 16.7 ‐4.6

2016 19.6 20.9 ‐5.9

Price Performance (RIC:MMFS.BO,BB:MMFS IN)

Source: Bloomberg

0

50

100

150

200

250

300

350

O c t ‐ 1 3

D e c ‐ 1 3

F e b ‐ 1 4

A p r ‐ 1 4

J u n ‐ 1 4

A u g ‐ 1 4

O c t ‐ 1 4

(Rs)(Rs)

MMFS’s Q2FY15 performance was slightly below our expectation as credit costs

remain elevated (200bps) and slower NII growth resulting in some pressure in

spreads. Asset quality was largely stable with no new customer additions while

collection efforts remained concerted on gradual movement in economic activity

AUM

growth

has

certainly

picked

up

on

higher

disbursements

but

clear

trends

arenot visible as environment remains volatile. We retain ‘Reduce’ rating with TP of

Rs255 as believe recovery will be hard and gradual for any pick up in return ratios.

Disbursement pickup in all segments, but still to follow in AUM: Disbursement

were flat YoY but has come off from negative territory. Pickup in disbursement

were led from Auto, CV & used vehicle segment, but pickup has not followed in

AUM as (1) Most of the growth was in end of the quarter (2) Only certain

geographies have showed improved activity and (3) Discounts still remain high

which reflect in AUM despite pick up in volumes. Management commentary was

optimistic but still are not clear if growth trends were to sustain, but still hope to

do well as it penetrates deeper into rural with diverse products.

Asset quality – largely stable with some movement in buckets: Asset quality

was stable

with

no

large

slippages

in

terms

of

fresh

customers

but

saw

some

movement in NPA buckets where loan dues have fallen beyond +200days as

some lag between repossession and sale of vehicle. This also kept credit cos

high at ~200bps. Monsoon relatively has been good and southern geographie

have started regaining economic activity which will help collection efforts and

cause lower delinquency. Management also indicated lost collections from

Q1FY15 would remain staggered over next few quarters as economic activity

picks‐up generally in H2 of the FY.

Improving prospects will be gradual on return ratios: Management clearly

indicated that growth will be highly effort based and will be slow and gradual

Also, collection efforts being in full force have been sluggish. Though MMFS has

geared up for opportunities, increased competition, lower return to risk profile

and volatile

environment

will

keep

return

ration

below

normalised

levels.

Key Financials (Y/e March) 2013 2014 2015E 201

Net interest income (Rs m) 20,234 25,014 28,605 34,22

Growth (%) 30.1 23.6 14.4 19

Non‐interest income (Rs m) 380 314 361 4

Operating Profit (Rs m) 15,340 18,516 20,590 24,74

PAT (Rs m) 8,541 8,872 8,995 11,06

EPS (Rs) 15.2 15.7 16.0 19

Growth (%) 25.6 3.8 1.4 23

Net DPS (Rs) 3.6 3.8 3.6 4

Profitability &

valuation

2013 2014

2015E 201

Spreads / Margins (%) 10.1 9.5 9.2 9

RoAE (%) 23.1 18.6 16.6 17

RoAA (%) 4.2 3.4 2.9 3

P/E (x) 18.2 17.6 17.3 14

P/BV (x) 3.5 3.1 2.7 2

P/ABV (x) 3.7 3.5 3.2 2

Net dividend yield (%) 1.3 1.4 1.3 1

Source: Company Data; PL Research



October 22,

2014

2


Exhibit 1:

MMFS Q2FY15: Steady quarter

(Rs m) Q2FY14 Q1FY15 Q2FY15 YoY QoQ

Income from Operations 12,031 12,752 13,537 12.5% 6.2%

Interest Income 12,031 12,752 13,537 12.5% 6.2%

Interest Expenses 5,253 5,949 6,168 17.4% 3.7%

Net Interest Income 6,779 6,803 7,369 8.7% 8.3%

Other Income 96 79 150 5 6.8% 91.0%

Total Income 6,875 6,881 7,519 9.4% 9.3%

Total Operating Expenses 2,249 2,269 2,521 1 2.1% 11.1%

Operating Profit (PPP) 4,625 4,612 4,998 8.1% 8.4%

Provisions & Write Offs 1,262 2,250 1,842 45.9% ‐18.1%

PBT 3,363 2,362 3,156 ‐6.2% 33.6%

Reported Profit 2,212 1,554 2,069 ‐6.5% 33.2%

Assets Under Management 311,465 342,710 356,942 14.6% 4.2%

Off ‐Balance

Sheet

AUM

16,794 20,092

‐9,287

‐155.3%

‐146.2%

NIM 8.94% 7.96% 8.43% ‐0.51% 0.47%

AUM (Rs m) 297,655 325,066 340,033 14.2% 4.6%

Auto/ Utility vehicles 80,367 97,520 98,040 22.0% 0.5%

Tractors 56,554 61,763 60,852 7.6% ‐1.5%

Cars / Others 71,437 74,765 77,756 8.8% 4.0%

Commercial Vehicles 47,625 45,509 47,330 ‐0.6% 4.0%

Used vehicles & Others 41,672 45,509 54,091 2 9.8% 18.9%

Asset Quality

Gross NPAs 12,223 20,278 21,314 74.4% 5.1%

Net NPAs 5,541 9,324 10,126 82.7% 8.6%

Gross NPA (%) 4.25% 6.42% 5.91% 1.7% ‐0.5%

Net NPA (%) 1.97% 3.06% 2.90% 0.9% ‐0.2%

Coverage (%) 53.6% 52.4% 51.0% ‐2.6% ‐1.4%

Credit costs ‐Calculated 1.62% 2.63% 2.07% 0.45% ‐0.56%

Balance sheet Details

Total Borrowed Funds 222,755 243,388 286,957 2 8.8% 17.9%

Loans & Advances & others 280,861 304,974 349,320 2 4.4% 14.5%

Total Assets 294,671 322,618 366,229 2 4.3% 13.5%

Subsidiary Performance

Insurance Brokers PAT 89 85 90 1.1% 5.9%

Rural Housing PAT 65 52 98 5 0.8% 88.5%

Source: Company Data, PL Research



October 22,

2014

3


Q2FY15 Concall Highlights:

Outlook & commentary:

Stoppage of discount which is 10‐12% of vehicle would alone increase AUM

growth of 5‐7%

Pickup in growth still not started on ground, some geographies have been

getting into problems

Used vehicles disbursements are picking up gradually for MMFSL

Have tied up with large manufacturers for whole India financing, which is

already happening in volumes

Tractors growth better in H2 of every year as utilization in H1 is low.

If underlying growth continues and stable market share MMFSL will still grow a

decent rates.

Balance sheet:

Rs20bn o/s securitized book.

LTVs at 70‐72% and CV/CE LTVs (including project cost) at 60‐65%

Collections:

Still largely employees being deployed for collections efforts.

Collections are still slow as lot of customers are day to day earners which have

gradual payment pattern

Asset quality:

No additions to fresh slippages from customers. Some bucket movement has

been there which increased provisions. Also, have done provisions on

repossessed vehicles where sale loss would have occurred.

NPA recognition norms of 90days or 120days from 180days currently will be no

a problem as regulator will give some time for implementing new norm with a

timeline. Will enhance collection effort and re‐possession if norms change o

start accelerating provisions on latest book of NPA.

Bad debt written‐off Rs720mn v/s Rs520mn in Q2FY14 and Loss from

repossessed sale written off at Rs920mn v/s Rs520mn



October 22,

2014

4


Exhibit 2:

AUM growth seems to be now flattening and should

pickup as disbursement were good in Q2FY5

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Q 4 F Y 1 1

Q 1 F Y 1 2

Q 2 F Y 1 2

Q 3 F Y 1 2

Q 4 F Y 1 2

Q 1 F Y 1 3

Q 2 F Y 1 3

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5


Exhibit 3:

Disbursement growth picked up mostly in end of th

quarter

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Q 4 F Y 1 1

Q 1 F Y 1 2

Q 2 F Y 1 2

Q 3 F Y 1 2

Q 4 F Y 1 2

Q 1 F Y 1 3

Q 2 F Y 1 3

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5


Exhibit 4:

Margins to remain volatile for some time ahead as mix gets adjusted

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

Q 4 F Y 1 1

Q 1 F Y 1 2

Q 2 F Y 1 2

Q 3 F Y 1 2

Q 4 F Y 1 2

Q 1 F Y 1 3

Q 2 F Y 1 3

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5


Exhibit 5: Opex/assets has moved up as MMFS gears up for improving lending prospects

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Q 4 F Y 1 1

Q 1 F Y 1 2

Q 2 F Y 1 2

Q 3 F Y 1 2

Q 4 F Y 1 2

Q 1 F Y 1 3

Q 2 F Y 1 3

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5

Op. Cost / Assets (%)




October 22,

2014

5


Exhibit 6:

Asset quality does not see any large slippages

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Q 4 F Y 1 1

Q 1 F Y 1 2

Q 2 F Y 1 2

Q 3 F Y 1 2

Q 4 F Y 1 2

Q 1 F Y 1 3

Q 2 F Y 1 3

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5

Gross NPA (%) Net NPA (%)


Exhibit 7:

Credit cost on AUM come off on largely stable asset quali

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Q 4 F Y 1 1

Q 1 F Y 1 2

Q 2 F Y 1 2

Q 3 F Y 1 2

Q 4 F Y 1 2

Q 1 F Y 1 3

Q 2 F Y 1 3

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5

Credit costs ‐ PL (AUM)


Exhibit 8: Quarterly change in GNPAs YoY – GNPAs growth has been sharp in past few

quarters

‐20%

0%

20%

40%

60%

80%

100%

Q 4 F Y 1 1

Q 1 F Y 1 2

Q 2 F Y 1 2

Q 3 F Y 1 2

Q 4 F Y 1 2

Q 1 F Y 1 3

Q 2 F Y 1 3

Q 3 F Y 1 3

Q 4 F Y 1 3

Q 1 F Y 1 4

Q 2 F Y 1 4

Q 3 F Y 1 4

Q 4 F Y 1 4

Q 1 F Y 1 5

Q 2 F Y 1 5

GNPA ‐ QoQ change


Exhibit 9: ROEs to move to 20% on stability in asset quality and margins

ROE Decomposition (on AUM) FY11 FY12 FY13 FY14 FY15E FY16E FY17

Net Interest Income/Assets 10.14% 9.20% 9.22% 8.81% 8.50% 8.72% 8.58%

Fees/Assets 0.30% 0.15% 0.16% 0.10% 0.10% 0.10% 0.09%

Investment profits/Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net revenues/Assets 10.44% 9.35% 9.37% 8.91% 8.60% 8.82% 8.67%

Operating Expense/Assets 3.78% 3.31% 3.06% 2.94% 2.95% 3.00% 3.00%

Provisions/Assets 1.23% 0.88% 1.17% 1.63% 1.95% 1.99% 1.70%

Taxes/Assets 1.85% 1.70% 1.63% 1.48% 1.18% 1.23% 1.27%

Total Costs/Assets 6.86% 5.89% 5.86% 6.05% 6.09% 6.22% 5.97%

ROA 3.57% 3.46% 3.52% 2.86% 2.51% 2.60% 2.70%

Equity/Assets 19.2% 16.5% 18.3% 16.4% 15.8% 15.5% 14.7%

ROE 22.0% 22.8% 23.1% 18.6% 16.9% 18.0% 19.7%




October 22,

2014

6


Exhibit 10:

We retain Reduce with Sep 16‐PT at Rs255 per share

Risk free rate 8.0%

Equity Risk Premium 6.0%

Beta 1.10

Cost of Equity 14.6%

Terminal growth 5.0%

Normalised ROE 19.4%

Stage 2 growth 18.0%

Sep‐15 PT 255

Subsidiary valuation 23

Implied Sep‐16 P/B – Lending Biz 2.33

Implied Sep‐16 P/E – Lending Biz 11.8

Source: Company Data, PL Research, Bloomberg



October 22,

2014

7


Income Statement (Rs m)

Y/e March 2013 2014 2015E 2016E

Int. Inc. / Opt. Inc. 36,422 46,894 53,850 62,848

Interest Expenses 16,188 21,880 25,244 28,620

Net interest income 20,234 25,014 28,605 34,229

Growth (%) 30.1 23.6 14.4 19.7

Non interest

income

380

314

361 415

Growth (%) 41.2 (17.4) 15.0 15.0

Net operating income 22,759 27,650 31,379 37,538

Expenditure

Employees 3,616 4,729 5,674 6,809

Other expenses 511 511 511 511

Depreciation 222 243 245 143

Total expenditure 4,350 5,483 6,430 7,463

PPP 15,340 18,516 20,590 24,742

Growth (%) 41.7 20.7 11.2 20.2

Provision 2,833 5,058 7,363 8,476

Other income — — — —

Exchange Gain / (Loss) — — — —

Profit before

tax

12,506

13,458

13,227 16,266

Tax 3,965 4,586 4,233 5,205

Effective tax rate (%) 31.7 34.1 32.0 32.0

PAT 8,541 8,872 8,995 11,061

Growth (%) 37.7 3.9 1.4 23.0

Balance Sheet (Rs m)

Y/e March 2013 2014 2015E 2016E

Sources of funds

Equity 1,126 1,127 1,127 1,127

Reserves & Surplus 43,420 49,815 56,446 64,601

Networth 44,546 50,942 57,573 65,728

Growth (%) 51.0 14.4 13.0 14.2

Loan funds

188,723

242,977

272,213 330,305

Growth (%) — 28.7 12.0 21.3

Others — — — —

Minority Interest — — — —

Deferred Tax Liability — — — —

Total 233,269 293,919 329,787 396,033

Application of funds

Net fixed assets 1,068 1,195 1,426 1,853

Advances 240,384 296,170 333,650 399,275

Growth (%) 37.4 23.2 12.7 19.7

Net current assets (13,792) (12,138) (13,630) (15,146)

Investments 5,610 8,692 8,341 9,982

Growth (%) 11.6 54.9 (4.0) 19.7

Other Assets

—

—

— —

Total 233,269 293,919 329,786 395,964

Source: Company Data, PL Research.

Quarterly Financials (Rs m)

Y/e March Q3FY14 Q4FY14 Q1FY15 Q2FY15

Int. Inc. / Operating Inc. 12,658 13,602 12,752 13,537

Income from securitization — — — —

Interest Expenses 5,891 5,975 5,949 6,168

Net Interest Income 6,767 7,627 6,803 7,369

Growth

20.6

15.0

10.4 8.7

Non interest income 53 104 79 150

Net operating income 6,820 7,732 6,881 7,519

Growth 20.4 14.0 10.6 9.4

Operating expenditure 2,528 2,293 2,269 2,521

PPP 4,292 5,439 4,612 4,998

Growth 13.2 16.4 10.9 8.1

Provision 1,796 748 2,250 1,842

Exchange Gain / (Loss) — — — —

Profit before tax 2,496 4,691 2,362 3,156

Tax 854 1,584 809 1,087

Prov. for deferred tax liability — — — —

Effective tax rate (%) 34.2 33.8 34.2 34.4

PAT

1,641

3,107

1,554 2,069

Growth (18.0) (6.9) (18.7) (6.5)

Key Ratios

Y/e March 2013 2014 2015E 2016E

CMP (Rs) 277 277 277 277

Eq. Shrs. O/s. (m) 563 564 564 564

Market Cap (Rs m) 155,872 156,005 156,005 156,005

Market Cap to AUM (%) 66.8 53.1 47.3 39.4

EPS (Rs) 15.2 15.7 16.0 19.

Book Value

(Rs)

79.1

90.4

102.2 116.

Adjusted Book Value (Rs) 74.5 80.2 87.2 99.5

P/E (x) 18.2 17.6 17.3 14.

P/BV (x) 3.5 3.1 2.7 2.4

P/ABV (x) 3.7 3.5 3.2 2.8

DPS (Rs) 3.6 3.8 3.6 4.4

Dividend Yield (%) 1.3 1.4 1.3 1.

Asset Quality

Y/e March 2013 2014 2015E 2016E

Gross NPAs (Rs m) 7,630 14,057 18,806 24,156

Net NPAs (Rs m) 2,600 5,756 8,463 9,662

Gross NPAs to Gross Adv. (%) 3.2 4.7 5.6 6.0

Net NPAs

to

Net

Adv.

(%)

1.1

1.9 2.5 2.4

NPA Coverage (%) 65.9 59.1 55.0 60.0

Profitability (%)

Y/e March 2013 2014 2015E 2016E

NIM 10.1 9.5 9.2 9.4

RoAA 4.2 3.4 2.9 3.0

RoAE 23.1 18.6 16.6 17.9

Source: Company Data, PL Research.



October 22,

2014

8


Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage

31.7%

51.9%

16.3%

0.0%0%

10%

20%

30%

40%

50%

60%

BUY Accumulate Reduce Sell

%

o f T o t a l C o v e r a g e

PL’s Recommendation

Nomenclature

BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months

Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months

Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month

Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as

information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be

considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy

or completeness

of

the

same.

Neither

PL

nor

any

of

its

affiliates,

its

directors

or

its

employees

accept

any

responsibility

of

whatsoever

nature

for

the

information

statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The

suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an

independent expert/advisor.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal o

engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.

We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

9_mm financial serv oct 14

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