M&M Financial Services Ltd. - Asit C. Mehta

Mahindra & Mahindra Financial Services Limited (MMFSL), a subsidiary of Mahindra & Mahindra Limited was incorporated on January 1, 1991. Being one of the leading NBFCs, the company provides vehicle finance (for utility vehicles, tractors, CVs, construction equipment, and Cars) and housing finance, focusing on the rural and semi-urban segments. MMFSL has a wide distribution network of 675 branches as on June 30, 2013 spanning 80% of the districts in India. MMFSL is one of the leading rural financers with AUM of Rs.295.39 bn as on June 30, 2013. The company has two subsidiaries, Mahindra Insurance Brokers Ltd. and Mahindra Rural Housing Finance Ltd.

Investment Rationale

Rural Advantage: More than 60% of the Indian population resides in rural areas, which remain a huge untapped opportunity. MMFSL is expected to benefit from growing per capita income in rural areas resulting due to the increasing focus of the government, launch of various rural development schemes such as NREGA, and the rising Minimum Support Prices for various crops.

Strong Distribution Network: As on June 2013, MMFSL has 675 branches covering ~80% of the districts in India. This spells a huge advantage as such a strong distribution network in rural areas creates high entry barriers for the competitors.

Diversified Loan Portfolio: The Company has come a long way from financing utility vehicles, passenger vehicles, and tractors. It has diversified into financing commercial vehicles, construction equipment, and pre-owned vehicles. This has helped the company reduce dependence on highly sensitive sectors that led to high NPA levels during 2008 and 2009. MMFSL has also reduced dependence on the parent (Mahindra & Mahindra Ltd.) for growth.

Asset Quality and NIMs: MMFSL commands best-in-class net interest margins (NIMs) in the 9.5-10% range. NIMs are expected to hold at a high 9%+ as the management expects to hike lending rates. Due to its high rural presence, the second half of the year sees better recoveries. The asset quality in Q1FY14 deteriorated sequentially due to this seasonality factor and also due to some stress on the commercial vehicles portfolio. The management confidently expects the NPAs to come down by the second half on the back of better monsoon and diversification.

Key Subsidiaries: MMFSL owns 85% stake in Mahindra Insurance Brokers Ltd. (MBL) and 87.5% in Mahindra Rural Housing Ltd. (MRHL). MRHL Provides loans housing loans to a wide base of customers in rural and semi-urban India. MBL is licensed by IRDA for undertaking insurance broking in life, non-life and reinsurance business.

Valuation

At the Current Market Price of Rs.245, the stock is trading at 2.9x its latest adjusted book value of Rs.81.7. We recommend investors to 'ACCUMULATE' the stock with a long-term perspective for a target of Rs.260.

Source : Equity Bulls

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