Fw: Company Report - Mahindra & Mahindra Financial Services Ltd - BUY

 

Mahindra & Mahindra Financial Services Ltd: Prime pick – BUY CMP Rs243, Target Rs283, Upside 16.5% Sturdy business model; brisk growth over FY10-13 Mahindra & Mahindra Financial Services Ltd (MMFSL), a subsidiary of M&M is one of the leading vehicle financing NBFCs in India with an AUM of Rs267bn. It has one of the largest rural and semi-urban distribution franchises comprising 657 branches across 25 states and 4 UTs. Starting as a captive finance company for M&M products, the company has evolved into a diversified vehicle financier. MMFSL's localized business model and nimble loan processing lends it with a strong pricing power. During FY10-13, MMFSL witnessed robust AUM growth and sharp improvement in assets quality driven by rural upswing and structural factors such as network expansion, conservative LTV/loan tenor, robust credit appraisal/monitoring and strong collections engine. Asset and earnings growth to slow but remain impressive In view of deep macro slow down and waning momentum in rural consumption, moderation in MMFSL's disbursement growth is likely to accentuate in FY14 (~18% v/s ~22% in FY13) before recovering marginally in FY15. The deceleration in disbursements would translate into moderated though respectable asset growth of 23.5% pa over FY13-15. MMFSL's NIMs are favorably placed in a declining rate environment and therefore would remain firm despite increase in competition. Delinquencies could show an uptick and along with migration to 120-day NPL recognition should drive a material increase in credit cost in FY14/15. Consequently, earnings growth is estimated to decelerate to 18-20% over FY13-15. Valuation is not cheap but can remain so; initiate coverage with BUY MMFSL's premium valuation amongst NBFCs (2.7x 1-year roll fwd P/BV) is likely to sustain aided by better earnings growth and RoA delivery. Diversified business compared to other vehicle financiers and strong relationships with manufacturers lend higher predictability to MMFSL earnings growth. Key risks to our hypothesis would be a negative surprise in asset growth and asset quality. Initiate coverage on MMFSL with a BUY recommendation and 12-month target price of Rs283 which includes forecasted value of Rs12.5 for insurance broking business and Rs4 for rural financing business.

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Warm Regards, Amar Ambani