Mahindra & Mahindra Financial Services - Results beat expectation; Rural leadership here to stay - Nirmal Bang

Mahindra & Mahindra Financial Services Limited (MMFS) is a subsidiary of Mahindra & Mahindra and is leading non-banking finance companies with strong focus on rural and semi-urban sector. It provides finance for most of the 4W and is also into rural housing finance and insurance products through its subsidiaries.

- MMFS reported strong operating performance for Q4FY13, driven by robust AUM growth and superior asset quality.

- Net interest income increased 33.2% on YoY basis.

- Profit before provisioning increased 20.7% QoQ and 29.2% YoY.

- PAT grew by 54% YoY. The company reported exceptional item of Rs 30.5 cr (profit of Rs 64.3 cr on sale of shares of Mahindra Insurance Broking of which the company utilized Rs 35.7 cr on general provision on standard assets). Adjusted for this PAT grew 41% YoY.

- Going forward, management expects the growth momentum to continue and believes that 23-25% growth is achievable in FY14E in the current scenario. Such a growth looks achievable as the company has achieved loan growth of 37% in Q4 driven by 15% increase in LCVs and 54% increase in UVs; while passenger cars/vans declined 5% YoY.

MMFS's major strength lies in its widespread and deep penetrated branch network of 657 offices spread across rural and semi-urban markets in 25 states as on 31st March 2013. We believe that MMFS has a large addressable market with further scope for deeper penetration into rural areas. The changing rural demographics coupled with improving rural income and consumption provides sufficient growth opportunities, going forward for the company despite increasing competition.

The diversified business model of the company augurs well with the "Little of everything and not more of anything" mantra of the company. Despite macros headwinds we believe that such a diversified product mix coupled with rural leadership and strong parentage will continue to drive the success story of the company. Consistently strong asset growth, multiproduct strategy with focus on high yielding products, relatively lower competition from private and public sector banks provides stability in margins. Moreover, strong return ratios and higher capital adequacy reinforces our confidence in the company. The stock is trading at 12.9x FY13 EPS and 2.56x FY13 P/BV which is slightly on the higher side as compared to peer group. However, given the niche business model with strong fundamentals, we believe that MMFS would continue to demand premium valuations amongst competitors. Based on Bloomberg estimates the stock is trading at P/E of 11.29x FY14E EPS and 2.21x on FY14E BV which suggests scope for further upside from current levels. We feel MMFS can give 15-20% return in near to medium term and can be purchased at current price.

Source : Equity Bulls

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