Shah Investors Home (SIHL) has maintained `Buy` on Mahindra & Mahindra Financial Services with a price target of Rs 781 as against the current market price (CMP) of Rs 670 in its report dated Apr. 25, 2012. The broking house gave the following rationale:
Q4 FY12 result update:
In Q4 FY12, Mahindra & Mahindra Financial Services (MMFSL) reported standalone net profit of Rs 2.28 billion up 47% YoY (up 45% QoQ) which was better than our expectations (Rs 1.78 billion). The profitability growth was due to lower provisions which grew by 23% YoY to Rs 140 million (declined by 71% QoQ). Net interest income grew by 28% YoY (20% QoQ) to Rs 5.08 billion driven by 36% YoY growth in AUM.
AUM growth continues to be driven by CV and Re-finance:
AUM grew by 36% YoY (6% QoQ) to Rs 206.43 billion led by across all segments but majorly driven by CV and re-finance in Q4 FY12. CV segment grew by 82% YoY, Re-finance by 59% YoY, Car segment by 36% YoY, Auto/UV segment grew by 32% YoY and Tractor segment by 18% YoY. Disbursement grew by 34% YoY to Rs 53.23 billion led by CV and re-finance. Management emphasized that company has emerged as the third largest financer for Maruti in rural India and enjoys 26% market share of Maruti rural sales.
Significant improvement in asset quality; the lowest GNPA%:
Asset quality significantly improved as GNPA % declined to 3% in Q4 FY12 from 4% YoY due to strong recovery system and rural cash flows as fourth quarter is seasonally better in terms of recoveries. Also, GNPA in absolute terms declined to Rs 5.54 billion from Rs 7.38 billion QoQ; came down to FY11 levels (Rs 5.49 billion). With healthy PCR at 78% (74% QoQ), NNPA declined to 0.7% from 1.1% QoQ.RBI has proposed to change the NPL recognition norms for NBFCs to 90 days past due from 180 days earlier. However, MMFSL recognizes NPLs on 150 days due. Thus, if RBI proposal implemented (expected to implement over three year period) will be better for company in longer term.
Gross Spread improves sequentially:
Gross spread as a % of average assets improved to 10.7% sequentially due to increase in lending rates by 50bps in Jan 2012; while it has declined from 11.9% YoY due to rise in interest cost. Also, increase in cost of funds (interest/average assets) by 30bps QoQ was compensated by increase in yield on loans (total income/average assets) by 80bps as cost increase have been passed on to the consumers by raising lending rates by 50bps in Jan 2012. Net spread improved to 5.9% sequentially (5.1% QoQ) led by lower provisioning due to write backs and recoveries.
Securitization of Rs 8 billion completed in Q4 FY12:
MMFSL completed the securitization of around Rs 8 billion in Q4 FY12, thus total securitization completed in FY12 amounts to Rs 14.87 billion which is `at par` structure. Also, in FY12 MMFSL shifted to conservative policy of income recognition for loans securitization i.e. not booking income upfront. MMFSL booked income from securitization of Rs 910 million which includes collection fees of Rs 100 million and provision write back of Rs 240 million.
Outlook & Valuation:
MMFSL has well diversified product profile (Mahindra and non-Mahindra vehicles, different customers (farmers, traders) and present across geographies (across the country) which resulted in strong AUM growth and improvement in asset quality. Also, with expectations of interest rate decline, MMFSL will benefit as its asset side is largely at fixed interest rate.
At CMP of Rs 670 the stock is trading at P/BV of 2.0X and 1.6X its FY13E BV of Rs 340 and FY14E BV of Rs.410 respectively. We value MMFSL at 2.3X the FY13E BV of Rs 340 and reiterate our target price to Rs 781. We maintain BUY on MMFSL with an investment horizon of 12 months and an upside potential of 17% from current levels.
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