Mahindra & Mahindra Financial Services - Niche model to sustain - Edelweiss

We recently interacted with Mr. Ramesh Iyer, Managing Director, Mahindra & Mahindra Financial Services (MMFS), alongside the entire senior management team (including business heads of all product verticals) to get insights into business dynamics. We believe rural buoyancy and adequate pricing power provides the desired competitive edge to help the company sail through the macro headwinds.

Sector highlights - Growth challenged on macro headwinds

Growth Metrics: Car/Auto segment are under pressure in urban areas, however, rural and semi-urban markets seem to be holding -aiding MMFS maintain market share. Tractors growth bounced back contributed by Madhya Pradesh and Rajasthan which are registering above average growth. Commercial Vehicle/Construction Equipment (CV/CE) segment are facing pressure in MHCV, however, small CVs are steady. Asset Quality: CV segment is showing signs of stress with incremental signs of large fleet operators delaying payments. Tractor segment: The advent of monsoon augurs well with limited pressure. Southern market show signs of a bounce back.

MMFS highlights - Deeper and broader penetration the key mantra

Growth Metrics: Car/Auto- Growth to be in the 20% range (versus 30% range earlier) - however, market share seen intact with larger focus on penetration. Tractor - Growth to be buoyed in Q2/Q3FY14 leading to 18-20% growth for FY14. CV/CE - Growth challenged, however, focus on small CVs likely to offset pressure. Used vehicles to be a key focus area. Margins: If current measures stay, then NIMs may contract by 30bps, however, we believe adequate pricing power is likely to offset pressure (50-100bps passed on incremental lending for various products). Competition: Strategy of getting deeper and broader to help offset competitive pressure. Omnivorous presence in rural and semi urban market helps maintain commendable market share.

Outlook and valuations: Niche model to sustain; maintain 'BUY'

MMFS is comfortably placed given its vast rural dominance and niche operating model. A well placed asset-liability management profile coupled with adequate pricing power will restrict the impact of rising cost of funds. The stock is trading at 2.2x FY15E P/BV with potential to clock RoA/RoE of 3.5%/20% plus. We maintain 'BUY/SO'.

Source : Equity Bulls

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