Mahindra & Mahindra Financial Servicew - Rural India going strong! - Consortium

Mahindra Finance (MMFS) is the leading NBFC focused on vehicle financing in the rural and semi-urban India. Rising farm incomes and improved infrastructure has created robust demand for vehicles and other assets in semi-urban and rural India. With over 628 branches spread across 24 states and 4 union territories, (~90% in semi-urban and rural areas), MMFS has been the prime beneficiary of this development. Total AUM as of 1HFY13 stands at Rs 237.7 bn.

Why do we like the stock?

- Sustained demand buoyancy in rural India: We expect MMFS to deliver a robust 25%+ AUM CAGR over FY12-14E; deeper geographic expansion, multi-product strategy and higher vehicle prices will drive business growth. Increase in government spending in rural India (pre-election year) and the proposed infra push could generate strong demand for vehicles, particularly in the bulk segment (tractors, LCVs, MHCVs and UVs) which could push up AUM CAGR to 30%+ over FY12-14E.

- Healthy asset quality: Lower LTVs, improved collection efficiency (larger recovery teams), multi-product/multi-profile strategy and cash flow buoyancy of the customer will ensure lower credit loss (<1.4%; GNPA <3.3%). Change in NPA recognition norm gradually to 90 dpd basis (120 dpd from April 2014 and 90 dpd from April 2015 as per the draft guideline issued by RBI) should increase GNPA by ~150-200 bps and increase provisioning by ~15-20 bps.

- Better NIMs: We expect NIMs at 10.5%+ led by easing cost of funds; yields to correct with a lag. Decline in leverage due to equity dilution (Rs 8.7 bn raised @ Rs 889/share; tier I CAR at 17.9% post QIP) will also help improve NIMs.

- Lower opex: Multi-product strategy and the direct marketing initiatives have increased the operating leverage at the branch/employee level and reduced the customer acquisition expense. We expect 400 bps+ decline in Cost/Income ratio over FY12-14E.

- Robust profit growth: We expect MMFS to deliver robust earnings CAGR of 30%+ with RoA at 4.0%+ and RoE of 22%+ over FY12-14E.

- Candidate for banking licence: Given the RBI's prime objective of financial inclusion, MMFS (directly or involving parent M&M; guidelines awaited), with its semi-urban and rural India centric business model is the strong contender for the new banking licence. Over the years, it has catered to the needs of the under-banked communities in semi-urban and rural India, ensuring financial inclusion.

Outlook and valuation

We continue to like MMFS being the proxy play on semi-urban/rural India consumption growth. Since FY07, MMFS has delivered strong 25% CAGR in AUM and 36% CAGR in net profits; sustained improvement in asset quality (FY09: credit loss of 4.3%, GNPA of 9.9%; FY12: credit loss of 1.08%, GNPA of 3.3%). Over the next three-five years, we believe, MMFS should sustainably deliver 25% loan book and earnings CAGR driven by the sustained demand for credit in semi-urban and rural India; competition continues to remain benign. We have adjusted our earnings estimates for the equity dilution; FY13E EPS at Rs 77.6 (earlier Rs 82.2) and FY14E EPS at Rs 96.1 (earlier Rs 98.2). Currently, MMFS is trading at 2.2x FY14E Core ABV and 10.8x FY14E PER; the strong growth profile, we believe, justifies the premium valuations. Maintain Buy with SOTP of Rs 1,175.

Source : Equity Bulls

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