Mahindra & Mahindra Financial Services - Prabhudas Lilladher

Growth going strong; FY14 could be another strong year: MMFS has been reporting better-than-expected growth of ~35% YoY driven by all segments excl. tractors as Mahindra continues to add new OEMs and aid in their rural sales financing.

Fixed rate book - Margins to inch up: MMFS's margins have been inching down as funding costs increased over last 4-6 quarters as MMFS did not pass on the entire cost hike to consumers. With wholesale rates easing and a completely fixed rate book, we believe margins for MMFS will bounce back over the next 3-4 quarters.

Operating leverage improving: MMFS's cost-to-assets have come off as opex growth remains lower than B/S growth as against their earlier longterm guidance of 3.5% stable cost/assets, MMFS is currently at ~3.2-3.3% cost/assets and management has now guided for 3.0% stable cost/assets guidance.

Asset quality stable; CRISIL feedback suggests limited stress on securitized pools: Credit costs have held up at relatively lower levels and management guidance continues to remain sanguine but there is limited primary data to corroborate management guidance. However, our feedback from CRISIL (securitization team) suggests that asset quality performance of MMFS's tractor pools have been satisfactory and there is no unusual build up in overdue buckets.

ROEs relatively high even after assuming a dilution: Sensitivity to Rs8bn dilution indicates a post dilution ROE of ~20% which remains best in class and valuations on diluted book at 1.9x FY14 book is undemanding in our view.

Source : Equity Bulls

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