M&M Financial Services –Accumulate- Kotak Securities
Mahindra & Mahindra Financial Services Ltd (MMFS) is a leading financier in the rural and semi-urban regions for automobiles. In the wake of healthy monsoon and improved agriculture growth, business growth outlook for MMFS appears highly positive.
A buoyant rural economy will significantly boost advances growth. Moreover, we are of the view that MMFS’s strong geographic spread with a branch network of 487 in rural and semi-urban regions will aid in swiftly scaling up its loan book.
We are raising our advances growth estimates for MMFS from 20% CAGR over FY11-12 to 25% CAGR to Rs.104.7bn and Rs.131.9bn in FY11 and FY12 respectively. We opine that the key growth drivers for the company continue to be the multi-utility vehicles, tractors and passengers car. While the commercial vehicle (CV) financing and pre-owned vehicle financing are expected to witness strong traction following a strong momentum in the economy activity going forward.
On the back of strong growth in advances over FY11-12, we have tweaked our earnings estimates. However, given the rising interest rate scenario, we opine that MMFS’s NIM is likely to remain stable. Hence, we continue to maintain our NIM estimates for FY11-12 at around 10% (based on average AUM). We expect a net profit growth of 14% yoy to Rs.3.9bn for FY11 and 33% yoy for FY12 to Rs520 crore.
On the asset quality front, government schemes like NREGA have bestowed rural population with higher cash, which has improved their purchasing power. With a healthy monsoon, we opine that asset quality is likely to improve with receding slippages.
During Q1FY11, the rise in NPA was mainly due to the farmer’s tendency of holding cash ahead of monsoon and beginning of Karif season, this is largely seasonal in nature. Higher provision coverage of 85%, coupled with better crop harvest and steady growth in rural disposable income will aid improvement in asset quality performance going forward. This reinforces our confidence in the company and will also help fetch premium valuations.
MMFS’s subsidiaries – insurance brokerage and rural housing finance are in nascent stage, and therefore we have not consolidated these businesses being insignificant. Trading at 2.9x FY11 and 2.4x FY12 P/ABVx; revising our price target to Rs610, maintain accumulate.
Tweaked our earnings estimates following steady growth in advances (25%
CAGR) and improvement in asset quality performance amidst healthy monsoon in India. We expect a net profit of Rs390 crore, up by 14% y-o-y for FY11 and Rs520 crore in FY12, growth of 33%yoy; leading to an EPS of Rs.40.9 and Rs.54 for FY11 and FY12 respectively.
We are highly positive on MMFS’s earnings growth outlook; hence, revising our dividend discount model (DDM) based one-year forward price target to Rs.610 (Rs. 520 earlier). Our target price offer a limited upside of 3% from current level, however a correction in the stock price will be an opportunity to ACCUMULATE the stock.
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