M&M Financial (MAHFIN) - ICICI Direct

Management Meet NoteRating matrixRating : UnratedTarget : NATarget Period : NAPotential Upside : NAKey Financials| crore FY09 FY10 FY11 FY12NII 751 904 1224 1314PPP 608 742 859 1082PAT 215 343 463 620Stock dataMarket Capitalisation| 7800 croreGNPA (Q1FY13)| 764 croreNNPA (Q1FY13)| 228 crore52 week H/L 805/590Equity capital| 104 CroreFace value | 10DII Holding (%) 5.41FII Holding (%) 32.5Price movement60005000400030001000800600400200Diversified rural play…September 6, 2012M&M Financial (MAHFIN)| 750Our interaction with the management of Mahindra & Mahindra FinancialServices (MMFS) gave us an insight into its business model and futureplans. MMFS, incorporated in 1991 (currently 56% subsidiary of Mahindra& Mahindra Ltd), is one of India’s leading NBFCs. The company’s focus isthe rural and semi urban market. MMFS has a diversified productportfolio constituting auto/utility vehicles, tractors, cars and commercialvehicles and construction equipment financing. The company has alsoentered rural housing finance, insurance broking and MF distributionthrough its subsidiaries.Decentralised modelMMFS has a pan-India network of 615 branches with a touch-base of~1,65,000 villages out of ~6,00,000 villages in India, reflecting the underpenetrated rural market and vast growth opportunities. The companyfollows a decentralised model with every branch and employee acting asa profit centre. Each employee’s variable pay is dependent on initiatingloans and its recovery. Local people are recruited at each branch, whichaids in understanding the behavioural pattern of the rural borrower. Thedaily collection is ~| 25-30 crore of which 65% is in cash. Over a periodof time, the company has developed a strong database, which gives it anedge over banks apart from strengths like a strong relationship withdealers and faster processing of loans.2000Sep-11Oct-11Nov-11Analyst’s nameDec-11Jan-12NiftyFeb-12Mar-12Kajal Gandhikajal.gandhi@icicisecurities.comVasant Lohiyavasant.lohiya@icicisecurities.comJaymin Trivedijaymin.trivedi@icicisecurities.comApr-12May-12Jun-12MahFin (RHS)Jul-12Aug-120Credit growth expected to be healthy though slower than earlier yearsIn the last two years over FY10-12, the company witnessed strong loanbook growth at a CAGR of 42% to | 17496 crore as on FY12. Owing to aweak macro environment, higher rates, weak monsoons and a higherbase, the sustainability of such high growth rate is difficult. Hence, themanagement expects growth to moderate (though still healthy) to 25-28%over the next two years mainly driven by utility vehicles, cars and CVsegment. The tractor financing segment is expected to witness somepressure and grow at 10-15%. Further, the management expects the ruralhousing finance subsidiary to double its loan book every year and istargeting a loan book of | 4500-5000 crore by FY15. Currently, the loanbook size is | 590 crore as on Q1FY13.Exhibit 1: Financial PerformanceFY09 FY10 FY11 FY12Net Profit (| crore) 215 343 463 620EPS (|) 21.5 34.4 43.5 58.2P/E (x) 34.4 21.5 17.0 12.7Price / Book (x) 4.8 4.1 3.0 2.6Price / Adj Book (x) 5.3 4.2 3.1 2.7GNPA (%) 9.4 6.5 4.0 3.0NNPA (%) 2.8 0.9 0.6 0.7RoNA (%) 3.0 4.1 4.1 3.9RoE (%) 15.4 21.4 22.0 22.8Source: Company, ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research

Exhibit 2: Loan mixThe proportion of UVs and tractor segment has come downfrom 63 % as on FY08 to 50% as on FY12, thus reducingthe dependency on financing of parent M&M’s vehicles andalso reducing the agriculture linked loan book to 20-24%(%)1201008060402007 6 6 6 77 8 9 1223 2425 2530 3123 23 2038 38 33 31 30FY08 FY09 FY10 FY11 FY1231Auto/UV Tractors Cars CVs Used vehicles and othersSource: Company, ICICIdirect.com ResearchIn order to reduce the risk of dependency of financing only parent M&Mvehicles, in the UV segment currently ~80-85% M&M vehicles arefinanced compared to 100% earlier. Further, in the tractor segment, forthe last two or three quarters the company has started financing tractorsof other manufacturers also. After witnessing severe NPA stress in FY09on the portfolio linked to agricultural activity, the company adopted astrategy of diversifying the customer profile. Currently, 40-50% of thetractor and UV portfolio is related to non-farming activities. Themanagement expects 27-28% growth in the UV segment and lower than10-15% growth in the tractor segment owing to weak monsoons and aslowdown in industrial activity.In the car segment, MMFS is the second largest financier for Maruti.Overall, ~70% of the portfolio belongs to Maruti while the rest belongs toother manufacturers. Total 27-28% growth is expected in the carsegment.The commercial vehicles and construction equipment financing segmentwitnessed strong traction in FY12 and now comprises 12% of theportfolio. In this segment, the strategy is to finance 10% to large fleetoperators, 40% to five or six truck owners, another 40% to first time usersand balance 10% towards light commercial vehicle (LCV). Strong growthhere is expected to continue owing to lower base and as permanagement the segment could form ~17-18% of the portfolio in thenext two or three years.Exhibit 3: Strong traction witnessed in last three years after dismal growth in FY08-09(| crore)20000180001600014000120001000080006000400020000423830133FY08 FY09 FY10 FY11 FY12454035302520151050(%)AdvancesAdvances growth YoY (RHS)Source: Company, ICICIdirect.com ResearchICICI Securities Ltd | Retail Equity Research Page 2

Exhibit 4: Asset quality improves significantly from high of 9.4% in FY09(%)10.09.08.07.06.05.04.03.02.01.00.09.48.06.54.03.1 2.83.00.90.6 0.7FY08 FY09 FY10 FY11 FY12GNPANNPASource: Company, ICICIdirect.com ResearchAsset quality and regulatory risksOwing to a crop failure in major states during FY09, the GNPA reached ahigh of 9.4%. However, the change in the loan mix towards lowerdependency on agricultural activity, introduction of newer segments likeCV and construction equipment financing and improvement in creditassessment and cash collection procedures led to NPAs fallingsignificantly to 3% (| 554 crore) as on FY12. As per the management,asset quality is expected to remain stable as of now, though persistentlyweak monsoons can put some stress on the quality of the book.Currently, ~20-24% of the book is dependent on agriculture, down from~45-50% book earlier.The impact of the worst case of no securitisation could be~20 bps to margins. At present, MMFS’ securitisationportfolio is 12%.On the regulatory front, in the final securitisation and PSL guidelines twomajor guidelines affecting MMFS are the requirement of minimumholding period (MHP) of six months and cap of 8% spread above thebank’s base rates for asset securitised. On an average, MHP for MMFS isabout four months. The impact of the worst case of no securitisationcould be ~20 bps to margins. At present, the MMFS securitisationportfolio is 12%. However, the major regulatory risk could be the 90 dayspast due NPA recognition norms recommended by the Usha Thoratcommittee compared to 180 DPD for NBFCs currently. This could lead tothe GNPA ratio increasing by ~150 bps to 5-5.3% with one-time increasein credit cost of ~| 30-35 crore, when implemented. However, themanagement expects adequate time to be given to shift the NPAclassification from 180 days past due to 90 days past due. The committeealso proposed Tier – I ratio of 12% for NBFCs from 7.5% currently. MMFSis comfortable on this front as it has Tier –I ratio of 14.7% as on Q1FY13.ICICI Securities Ltd | Retail Equity Research Page 3

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