Mahindra Finance - Subsidiaries boost the edge; core business sustains - Avendus

Positives in the core business, which support a strong earnings growth, are likely to stay as concerns on a slowing CV cycle and monsoons fade. We retain our FY13-FY15 earnings forecast of a CAGR of 19% for MMFS (standalone). Strong synergy with the subsidiaries is likely to aid value creation. Contribution from the subsidiaries is likely to increase given their strong earnings potential. We supplement the value of the standalone entity by adding our estimated value for its two subsidiaries. The stock has outperformed the benchmark indices over the last one month. Following the run-up, valuations at 2.3x one-year forward BV appear fair. We retain our forecasts and lower our rating to Hold with a revised Sep13 TP of INR882. MMFS continues to remain our preferred pick among retail financials, as earnings growth may stay ahead of peers.

Growth, margins and asset quality remain strong despite challenges

Loan growth is likely to remain strong, driven by a gradual turn in the CV cycle. The management expects inventory levels and discounts to gradually decline. The fall in tractor sales has likely reduced cash purchases, while growth in tractor loans is likely to exceed 15%. Asset quality is likely to stay stable, despite concerns as rural cash flows continue to remain strong. We forecast a CAGR of 19% in aggregate loans over FY13-FY15. NIMs are likely to remain stable at a three-year mean of 11.2%. We retain our earnings forecast at a CAGR of 19% for MMFS over FY13-FY15.

Synergies with the parent may benefit subsidiaries

Mahindra Insurance Broking (MIBL) derives c60% of its premium income from MMFS' customers, while Mahindra Rural Housing Finance (MRHF) benefits from the parent's network in rural and semi-urban areas. Synergistic benefits with MMFS, local knowledge and experienced management is likely to aid value creation.

Incorporating value emerging from the subsidiaries

The two subsidiaries may enhance their contribution to MMFS' consolidated earnings by the end of FY15. The recent sale of a minority stake in MIBL is likely to sustain the high growth. We supplement the value of the standalone entity by adding INR54 as our estimated value for the two subsidiaries. We value MIBL at 13x one-year forward earnings (at a discount to the implied valuation in the stake sale) and MRHF at 1.8x one-year forward BV. The standalone entity is valued using a combination of the P/E, P/B and DCF methods.

High-quality pick in retail financials even after recent run-up; Hold

The stock has outperformed the Bankex and NBFC Index (excluding HDFC) over the last month by 5% and 3%, respectively. Following the run-up, valuations at 2.3x one-year forward BV appear fair. We retain our forecasts, while lowering our rating to Hold with a revised Sep13 TP of INR882. MMFS continues to be our preferred pick among retail financials, as its earnings growth is likely to remain ahead of peers.

Source : Equity Bulls

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