M&M Financial (MAHFIN) - ICICI Direct

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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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