mahndra finance - initiation jan 10

7/30/2019 Mahndra Finance - Initiation Jan 10

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al Services

Financial Institutional Securities Private Limited Page 2

Mahindra & Mahindra Financial Services

11 January 2010 JM Financial Institutional Securities Private Limited

Exhibit 2: MMFS Key Financials

Source: Company, JM Financial, Note: * Figures for ratios signify change over the specified period.

Key Parameters FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E

Balance sheet

Borrowings (Rs. bn) 11 16 25 39 49 50 52 64

Loans (Rs. bn) 13 18 29 45 59 66 68 83

Securitized (Rs. bn) 0 0 4 5 6 8 11 13

AUM (Rs. bn) 13 18 33 50 65 75 79 96

Total Assets (Rs. bn) 15 20 31 50 63 70 74 90

Assets Growth (%) 34.9% 39.9% 53.2% 61.2% 25.1% 11.8% 6.0% 20.8%

Income statement

NII (Rs. bn) 1.5 2.0 2.7 3.7 5.2 7.7 8.7 9.8

Operating profits (Rs. bn) 1.1 1.4 1.9 2.4 3.2 5.2 6.1 6.8

PAT (Rs. bn) 0.4 0.7 0.8 1.1 1.3 1.8 2.1 2.8

ProfitabilityInterest Spread (%) 11.57% 11.29% 9.63% 7.91% 7.76% 9.60% 9.63% 9.89%

NIM (%) 13.08% 12.51% 10.86% 9.34% 9.28% 11.74% 12.34% 12.28%

ROA (%) 3.48% 3.74% 3.20% 2.66% 2.35% 2.66% 2.97% 3.37%

ROE (%) 23.1% 28.5% 27.1% 20.9% 18.2% 16.9% 15.4% 17.7%

Asset Qu ali ty

Gross NPL (Rs. mn) 1,090 1,556 1,992 2,472 3,582 5,572 6,909 7,652

Gross NPL (%) 8.10% 8.33% 6.64% 5.34% 5.90% 7.97% 9.42% 8.62%

Net NPL (Rs. mn) 412 743 1,008 1,133 1,548 2,053 1,943 2,296

Net NPL (%) 3.22% 4.16% 3.48% 2.52% 2.64% 3.09% 2.84% 2.75%

Loan Loss Charge (Rs. mn) 396 415 560 816 1,195 2,463 2,824 2,601

Coverage (%) 62.3% 52.2% 49.4% 54.2% 56.8% 63.2% 71.9% 70.0%


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JM Financial Institutional Securities Private Limited Page 311 January 2010


(MMFS)

Tapping rural auto finance demand

Mahindra & Mahindra Financial Services (MMFS) is a subsidiary of M&M which isprimarily focused on the rural and semi-urban areas providing finance for utility

vehicles (UVs), tractors, cars and commercial vehicles. MMFS's client base consists

of small entrepreneurs and self-employed individuals such as transport operators

taxi operators and farmers. M&M vehicles account for c.65% of the loan book.

Positioned to address rural market

MMFS targets rural population which (a) do not have access to bank credit due to

their inability to meet the lending covenants of the banks and (b) cannot afford

exorbitant rates charged by private financiers. MMFSs business model is positioned

to tap the demand for financing in such under-banked rural and semi-urban areas

Individuals and small entrepreneurs are the target customers. The company doesnot use DSA model and relies completely on its employees to source the

customers.

Exhibit 3: MMFSs Financing Model

Source: JM Financial


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Porter Five Force analysis Rural knowledge is source ofsignificant advantage

On the basis of Porter Five Force analysis, MMFS enjoys significant advantage on

account of it having gained significant experience of the local characteristics of the

rural and semi-urban markets across India. Further, a well diversified distribution

network, locally recruited employees, relationship with dealers and a strong parent

has resulted in a strong brand in these rural and semi-urban areas which is a

source of significant advantage.

Exhibit 4: MMFS Porter 5 Force analysis

Source: JM Financial


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Growth is back - Loan book to witness 19%CAGR over FY09-12E

After tepid growth of just 3% in FY09 impacted by tight liquidity environment,

higher interest rates and slowdown in the automobile industry, we expect loan

book to grow at 19% CAGR over FY09-12E period due to (a) revival in the

automobile industry should lead to higher disbursements for cars and utilityvehicles (UVs) (b) expectation of better rabi crop and increase in acreage should

drive tractor disbursements. Further, higher government expenditure in rural areas

has boosted non-farm income in the hands of rural India resulting in improved

demand for UVs and cars (c) non-M&M product portfolio (primarily Maruti) is

expected to continue with robust performance (d) Entry of M&M group in CV

market opens another product line for MMFS and increases the opportunity fo

financing new products of M&M.

(a) Revival in the automobile industry should lead to higher

disbursements for cars and utility vehicles (UVs)

Driven by stimulus package provided by the government and easing of retai

finance rates, automobile industry has witnessed revival over the past 6-9 months

During March-November 09, automobile industry has grown by 20% while M&M(domestic) has posted a strong growth of 21%. Going forward, with the improved

IIP and GDP numbers, we expect current growth momentum to continue which

should lead to higher disbursement for cars and UVs.

Exhibit 5: MMFS Trend in automobile sales and MMFSs dependence on M&M

-80.0%

-40.0%

0.0%

40.0%

80.0%

120.0%

Mar'07

July'07

Nov'07

Mar'08

July'08

Nov'08

Mar'09

July'09

Nov'09

PV YoY Growth (%) CV YoY Growth (%)

-45.00%

-30.00%

-15.00%

0.00%

15.00%

30.00%

45.00%

Q4'07

Q1'08

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

Q3'09

Q4'09

Q1'10

Q2'10

M&M YoY Growth (%) MMFS AUM YoY Growth (%)

Source: SIAM, JM Financial

(b) Better rabi crop and higher government spending to remainmain demand drivers

The acreage and output of most rabi crops are expected to increase mainly due tobetter irrigation facilities and late revival of monsoon resulting in higher reservoir

levels. Expectation of better rabi crop will drive tractor disbursement. Recent

government initiatives such as increasing minimum support prices (MSP) and

programmed like National Rural Employment Guarantee Act (NREGA), Sampoorna

Gramin Rozgar Yojana (SGRY), Swarnajayanti Gram Swarozgar Yojana (SGSY) are

driving non-farm rural demand. The Government is also pushing for infrastructure

reforms which are resulting in higher employment opportunities and highe

disposable income. We believe these factors will provide a boost to the demand fo

UVs and cars and lead to higher disbursement and loan growth for MMFS.


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(c) Expanding non-M&M loan portfolio

Currently M&M contributes c.65% of total sales of MMFS. The Company is

consciously trying to diversify and reduce its reliance on M&M. It has already tied

up with Maruti, Hyundai Motor, Hero Honda, Tata Motors (avoids financing o

competitive models) Bajaj Auto and TVS Motor for financing of their vehicles.

Expanding and capturing non-M&M auto market will be the focus for MMFS to

participate in auto industry revival which will augment loan growth.

(d) CV loans to get a push

M&M has entered into light, medium and heavy commercial vehicles for domestic

as well as export markets. M&M has launched 2 products called as GIO and

Maxximo and it has already sold 1,019 units of GIO in the very first month of its

launch (November 09). Entry of M&M into CV opens additional product line for

MMFS and we expect it to finance c.65% of M&M CV sales. This should also help to

drive loan book growth at MMFS.

Loan book to grow at 19% CAGR over FY09-12E

We have factored in loan book growth of 19% CAGR to Rs 114 bn over FY09-12Eafter slowdown witnessed over the last 2 years. We expect AUM to expand at 18%

CAGR to Rs 131 bn during the same period.

Exhibit 6: MMFS - Trend loan book growth

1318

29

45

59

83

98

114

6866

0

20

40

60

80

100

120

140

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E

0%

10%

20%

30%

40%

50%

60%

70%Loans (Rs.Bn.) YoY Growth (%)

Source: Company, JM Financial

M&M continues to account for c.65% of total sales

MMFS was originally set up to provide finance to M&M dealers for purchase of M&M

vehicles and tractors while M&M provided necessary capital support. MMFS stil

remains the largest retail financier for M&M which contributes c.65% of MMFS

sales. It finances c.32% of auto and c.28% of tractor sales of M&M group. The

company is planning to reduce its reliance on M&M by tying up with other

automobile producers such as Maruti, Hyundai Motor, Hero Honda, Tata Motors

Bajaj Auto and TVS Motor. Currently non-M&M sales constitute 35% of loan book,

of which Maruti vehicles contributes c.80%.

Growth is back after2 yrs of slowdown


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AUM composition- To focus more on commercial vehicles thantractors

MMFS primarily finances acquisition of new as well as used utility vehicles (UVs) for

commercial and personal purpose, tractors and cars. In Q210, UVs, tractors and

cars combined constituted c.86% of total AUM. As per the management, it has

market share of c.14% in tractor financing and 10-12% in UV financing. The

company also provides finance for commercial vehicles (c.9% of AUM) and personaloans only to existing customers. Going forward, the company intends to increase

CV loans exposure to c.15% of total loan book given increasing opportunities to

finance the same on account of M&Ms entry into the CV market. We expect the

proportion of tractors to decline over FY09-12E.

Exhibit 7: MMFS- Trend in composition of AUM

43% 38% 38% 35%

19% 25% 25%23%

26% 23% 24% 28%

3% 7% 7% 9%9% 7% 6% 5%

0%

20%

40%

60%

80%

100%

FY07 FY08 FY09 Q2'10

Auto/ Utility vehicles Tractors Cars Commercial Vehicles Refinance & Others



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Funding mix

MMFS raises funds from diversified sources which includes non-convertible

debentures, bank term loans, commercial paper, fixed deposits and securitization

Borrowing mix has been dominated by term loans and debentures which accounts

c.90% of total borrowing. MMFS enjoys excellent liability franchise on account of

higher credit rating and strong parentage support. It enjoys credit rating of AA-

(Stable) from CRISIL and AA from Fitch. Currently c.85% of is fixed rate borrowingwhile rest is floating with average duration of 30 months.

Exhibit 8: MMFS Borrowings Profile

CAGRBorrowings - Break-up(Rs mn) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY03-09 FY09-12E

Fixed loans 3,113 4,041 5,804 8,702 13,134 12,672 22,845 25,648 31,913 39,450

Growth (%) 30% 44% 50% 51% -4% 80% 12% 24% 24% 39% 20%

Share (%) 28% 26% 24% 22% 27% 25% 44% 40% 42% 44%

Debentures 5,440 10,510 16,910 26,850 31,370 34,300 23,563 32,060 36,472 43,036

Growth (%) 93% 61% 59% 17% 9% -31% 36% 14% 18% 28% 22%

Share (%) 49% 67% 69% 69% 64% 68% 45% 50% 48% 48%

Other Loans 2,542 1,163 1,828 3,277 4,896 3,453 5,722 6,412 7,598 7,173

Growth (%) -54% 57% 79% 49% -29% 66% 12% 19% -6% 14% 8%

Share (%) 23% 7% 7% 8% 10% 7% 11% 10% 10% 8%

Total 11,095 15,715 24,541 38,829 49,399 50,425 52,130 64,120 75,982 89,659

Growth (%) 39% 42% 56% 58% 27% 2% 3% 23% 19% 18% 29% 20%


Reducing dependence on MFs for borrowingsAfter the financial crisis of FY09, the Company has reduced its dependence on

mutual funds to 25% in Q2FY10 from 50% in Q2FY08. The Company intends to

maintain limited exposure of 30% to mutual funds and is planning to increase its

reliance on insurance company from current level of 10% to c.20% over the next 2

years. MMFS has also started to mobilize fixed deposits (FDs) to create and

strengthen relationship in its target markets and it expects FDs to constitute c.8%

of total borrowings by FY12. It has also increased its banking relationship to 28-30

banks from 18 banks earlier. We believe these steps have resulted in a wel

balanced funding profile for the company.

Exhibit 9: MMFS Change in funding mix over last 2 years

Mutual

Funds

49%

Banks

44%

Insurance

Co.

4%

Others

3%

Mutual

Funds

24%

Others

5%

Insurance

Co.

10%

Banks

61% Source: Company, JM Financial

Q2FY08 Q2FY10


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Securitization to be capped at c.18% of AUM

MMFS does non-recourse securitization transactions to improve capital adequacy

ratio and to free up its resources to fund its asset under management. Tractor and

other loans of MMFS which constitutes c.40% of total loan portfolio, is eligible as

priority sector lending (PSL) for banks and other financial institutions. It is

extremely attractive for banks to purchase such assets to meet their PSL

requirement. We believe MMFS will continue to use securitization as additionasource of funding but it intends to cap securitization at c.18% of AUM. Currently,

securitized portfolio comprises c.14% of MMFSs total AUM and we expect the ratio

to remain stable going ahead.


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Pressure on Margins going ahead

Margins to decline by 80bps over FY09-12E

The current environment of surplus liquidity has benefited wholesale funded

institution like MMFS and helped its cost of funds to decline by 71 bps yoy to

8.79% in 2Q10. For MMFS, proportion of fixed rate liabilities is c.85% and thecompany has already tied up finances for coming quarter, hence near term margins

are expected to display flattish trend. Going forward, with interest rates expected

to go up; we expect borrowing cost to go up over FY10-12E period. On the asset

side, given that almost all of MMFSs loans are at fixed rate and the change in loan

composition in favour of low yielding CVs ( average yield of c.17-18%) from high

yielding tractors (average yield of c.21-22%), we expect yields to decline by

c.20bps over FY09-12E. Consequently spreads and margins are expected to remain

under pressure (mitigated to an extent by higher securitization income). We have

factored in 80bps decline in margins over FY09-12E and expect 14% CAGR in NI

over FY09-12E vs. 34% CAGR over FY05-09 period.

Exhibit 10: MMFS Trend in NII and Margins

2.02.7

3.75.2

7.78.7

9.811.2

12.9

0

4

8

12

16

FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

NII (Rs. Bn.) YoY Growth (%)

11.6%

10.1% 10.1%10.8%

10.2%

10.9%

9.3% 9.3%

11.7%12.3% 12.3%

11.7% 11.5%

8.1% 8.3%

10.9%

10.1%

12.5%

7.0%

9.0%

11.0%

13.0%

15.0%


NIM (%) NIM (incl. securitization inc.) (%)



11/24



Diversified distribution network

Well supported by deeply penetrated distribution network

MMFS has an extensive distribution network, spread over rural and semi-urban

areas, with presence in 25 states and 2 union territories through 439 branches

covering almost 90% of the districts in India. It also uses distribution network of

more than 1,000 M&M and other dealers. Such nationwide distribution network actsas a hedge against crop failures or risk of monsoon in a particular region.

Exhibit 11: MMFS Region-wise Distribution network

West

19%

East

16%

South

23%

North

42%

Rural

79%

Metro

1%

Urban/Semi

Urban

20%


Resumption in Branch expansion

Over the last 2 years, due to difficult working environment, MMFS decided to go

slow on its branch expansion strategy and opened only 5 branches in last 8

quarters. However going forward, it intends to resume its branch expansion

strategy and expects to open c.25 branches over the next 12 months. However,

given faster balance sheet growth, we expect cost to income ratio to remain c.30%going ahead implying 13% CAGR in operating expenses during the period.

Exhibit 12: MMFS Trend in distribution network and operating cost ratios

8051,115

1,7732,296

2,791

4,9595,141 5,181

5,401

4,597

196224

256

305

403

491471451436

436

0

1000

2000

3000

4000

5000

6000


100

200

300

400

500

600Number of Employees Total Branches (RHS)

30% 30%

35%38%

33%30% 31% 30% 29%

10.0%

20.0%

30.0%

40.0%

50.0%


2%

3%

3%

4%

4%

Cost to Income Ratio (%) (LHS) Cost to Assets (%)



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Asset Quality: The worst is over

Gross NPAs to remain at elevated levels, credit costs havepeaked

Credit costs to decline by 80bps, coverage ratio now at healthy level of

71%: Asset quality at MMFS had deteriorated significantly from FY06 onwards on

account of higher delinquencies. Delinquencies increased from c.3.8% in FY06 toc.5.7% in FY08.Consequently gross NPA ratio increased from 5.3% in FY06 to c.8%

in FY08. However during FY09, increase in gross NPA ratio to 9.4% was primarily

on account of slower growth while delinquencies improved by 90bps to 4.75%

Going ahead, given the nature of the business wherein lending is to customers with

irregular cash flows, we expect gross NPAs to remain at elevated levels of c.8.3%

in FY12E for MMFS with net NPA at c.2.6%.

Exhibit 13: MMFS Trend in asset quality and coverage ratio

8.3%

5.3%5.9%

8.6% 8.4% 8.3%

4.2%3.5%

2.5% 2.6%3.1% 2.8% 2.8% 2.7% 2.6%

9.4%

8.0%

6.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%


0.0%

16.0%

32.0%

48.0%

64.0%

80.0%

Gross NPLs (%) Net NPLs (%) Coverage (RHS) (%)


Credit costs have peaked in FY09

Credit costs in our opinion have peaked at c.420bps in FY09 and are expected todecline by 80bps over FY09-12E driven by:

(a) Higher loan growth of 19% CAGR over FY09-12E: After tepid growth o

just 3% in FY09 impacted by tight liquidity environment, higher interest rates and

slowdown in the automobile industry, we expect loan book to grow at 19% CAGR

over FY09-12E. This revival in the industry augurs well for the asset quality at

MMFS.

Exhibit 14: MMFS Trend in loan book and growth

1318

29

45

59

83

98

114

6866

0

20

40

60

80

100

120

140


0%

10%

20%

30%

40%

50%

60%

70%Loans (Rs.Bn.) YoY Growth (%)



13/24



(b) Governments rural spending and increase in MSP leading to better

recoveries: In last 2 years, rural incomes have received a boost as a result o

recent Government measures like the National Rural Employment Guarantee Act

(NREGA), Sampoorna Gramin Rozgar Yojana (SGRY), Swarnajayanti Gram

Swarozgar Yojana (SGSY), Central Government salary hikes, farm loan waivers and

increase in minimum support prices (MSP). Due to higher gold prices, people in

rural areas are selling gold to buy productive assets. All these factors are leading to

improvement in cash collection and consequently better recoveries for MMFS.

Exhibit 15: MMFS Trend in MSP prices in selected crops (YoY growth %)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

FY04 FY05 FY06 FY07 FY08 FY09 FY10

Paddy Cotton Wheat Barley Sugarcane Soyabeen Sesamum


(c) Expected improvement in delinquency levels coupled with healthy

coverage ratio at 71%: MMFS increased its provisioning cost in FY09 despite

improvement in delinquency level by 90bps primarily to increase its coverage ratio

from 63% in FY08 to 71% in FY09. Consequently with expected improvement indelinquency levels going ahead and coverage ratio at healthy level, we expect

credit costs to decline by 80bps from 420bps in FY09 to c.320bps in FY12E.

Exhibit 16: MMFS Trend in Delinquency, LLP and coverage ratio (%)

5.0%

3.8% 4.0%

5.7%

4.8% 4.6%4.3% 4.3%

6.5%

2.7%2.4% 2.2%

3.4%3.4%3.4%

4.2%3.9%

2.3%

0.0%

2.0%

4.0%

6.0%

8.0%


0.0%

20.0%

40.0%

60.0%

80.0%

Delinquency Ratio (%) LLP (LHS) (%) Coverage (RHS) (%)


Delinquency improvedand coverage ratioincreased in FY09

Maximum growth in MSP in last2 years i.e. FY09 and FY10;should lead to better recoveries


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Well Capitalized-No dilution required tillFY12MMFS would have sufficient Tier I capital till FY12 of c.16%.Hence we do not expec

any dilution in the next 3 years (unless the assets growth is significantly higher

than our expectations going ahead).

Exhibit 17: MMFS - Trend Tier I capital

11.2%10.5%

13.2%

11.3%

16.8% 17.3% 16.6% 16.3% 16.0%

0%

4%

8%

12%

16%

20%

FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E

Tier I



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New Ventures

Foray into insurance broking and rural housing

Insurance broking

MMFS offers insurance broking through its wholly-owned subsidiary, Mahindra

Insurance Brokers Limited. Till now, it has sold 0.28 mn policies for both life and

non-life insurance covering mostly the rural markets. In FY09, the subsidiarys

profits grew by c. 30% yoy at Rs.65 mn. Going forward, the Company expects its

insurance broking business to contribute 5% of its bottom line.

Rural Housing

MMFS carries rural housing finance business through its subsidiary, Mahindra Rura

Housing Finance Limited (MRHFL) wherein it holds 87.5% stake and the balance

held by NHB. In FY09, it disbursed loans aggregating to Rs.434 mn while

outstanding loan portfolio stood at Rs. 452 mn. It reported PAT growth of 33% to

Rs.80 mn. Rural housing finance is still in its initial stage and the Company is

planning to grow its loan portfolio aggressively from FY12 onwards.

Venturing into gold loans

MMFS is planning to enter into business of gold loans and currently carrying out

pilot testing for the same.

We have not factored in the value of the above subsidiaries in arriving at our target

price.


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Earnings growth of 20% CAGR over FY09-12E

Earnings CAGR at c.20% over FY09-12E, despite factoring in margin pressure

We forecast PAT to witness c.20% CAGR over FY09-12E despite factoring in margin

pressure of 80bps on account of increase in borrowing costs. This growth would be

driven by robust loan of growth of 19% CAGR over FY09-12E and moderation in

credit costs by 80bps due to expected improvement in delinquency and higher

balance sheet growth. We expect MMFS to report healthy return ratios with ROAand ROE of c.3.2% and c.18.3% respectively in FY12E.

Exhibit 18: MMFS - Trends in return ratios

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%


5%

10%

15%

20%

25%

30%

ROA (LHS) ROE (RHS)

652823 1,083

2,145

2,772

3,171

3,701

1,770

1,329

0

900

1,800

2,700

3,600

4,500

FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E

0%

10%

20%

30%

40%

50%

60%Net Profit (Rs.Mn.) YoY Growth (RHS)


Initiate coverage with Buy and TP of Rs425: We value MMFS at 11x FY12E

EPS (implied P/BV of 1.9x) implying Mar11 target price of Rs 425, upside of

c.25% from the current levels.

Exhibit 19: One-year forward P/BV (x) & One-year forward PE (x)

3

6

9

12

15

18

Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09

Fwd. PE (x)

0.8

1.1

1.4

1.7

2.0

2.3

2.6

2.9

Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09

Fwd. P/BV (x)

Source: Bloomberg, JM Financial.


17/24



Mahindra Finance: ROE TreeHealthy return ratios: MMFS is on track to report healthy return ratios with ROA

and ROE of c.3.2% and c.18.3% respectively in FY12E.

Exhibit 20: MMFS - Normalised earnings (%)

Mahindra Finance FY06 FY07 FY08 FY09 FY10E FY11E FY12ENet Margin (as % of avg. IEA) 9.34% 9.28% 11.74% 12.34% 12.28% 11.73% 11.52%

NIM (as % of avg. Assets) 9.18% 9.13% 11.51% 12.02% 11.94% 11.44% 11.26%

Core Non-IR/Asset 0.08% 0.03% 0.08% 0.08% 0.07% 0.06% 0.06%

Core Non-IR/Revenues 0.9% 0.3% 0.7% 0.6% 0.6% 0.5% 0.5%

Core Revenu e / Ass ets 9.27% 9.16% 11.59% 12.09% 12.02% 11.51% 11.31%

Cost/ Core Income 35.3% 37.8% 32.8% 30.5% 31.1% 30.2% 29.4%

Cost/Assets 3.27% 3.46% 3.80% 3.69% 3.74% 3.48% 3.33%

Core operatin g Profits 5.99% 5.70% 7.79% 8.41% 8.28% 8.03% 7.99%

LLP/Loans 2.21% 2.31% 3.94% 4.19% 3.43% 3.37% 3.35%

Loans/Assets 90.9% 91.7% 94.0% 93.2% 92.4% 92.6% 92.3%

Profits/Provisions on Sect. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Pre-Tax 3.98% 3.59% 4.09% 4.50% 5.11% 4.91% 4.89%

Effective Tax Rate 33.2% 34.5% 34.9% 34.1% 34.0% 34.0% 34.0%

ROAA 2.66% 2.35% 2.66% 2.97% 3.37% 3.24% 3.23%

Equity / Assets 12.75% 12.91% 15.71% 19.22% 19.05% 18.16% 17.59%

RoE 20.9% 18.2% 16.9% 15.4% 17.7% 17.9% 18.3%



18/24



Key Risks

Significant reliance on M&M for growth: M&M accounts c.65% of total sales o

MMFS indicating significant reliance on the parent for growth. M&Ms inability to

grow will adversely affect MMFSs growth prospects and is a key risk to ou

hypothesis.

Shift in government policy: Ruraleconomy showed resilience mainly because oincreased spending by the government through various schemes such as NREGS

and MSP. Any policy shift in such schemes could lead to slower growth for MMFS

and impact its earnings adversely.Further it may result in deterioration in assetquality affecting its cash collection and could adversely affect the profitability of the

company.

Higher than expected credit costs: Although we have been conservative in our

credit cost assumptions, higher than expected delinquencies remains a risk to our

estimates.


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Company background

Mahindra & Mahindra Financial Services Ltd (MMFS), part of the Mahindra Group, is

non-banking finance companies with a pan India presence. Focused on the rura

and semi-urban sector, it provides finance for utility vehicles used both for

commercial and personal purposes, tractors and cars. While it predominantly

finances M&M UVs and tractors, it has continued to expand lending to non-M&M

vehicles. The Company has also entered in mutual fund distribution and insurancebroking, and offers rural housing finance and fixed deposit schemes. It has the

largest network of branches amongst NBFCs operating in these areas. MMFS

currently has a network of 439 offices and total assets under management of Rs.93

bn.

Timeline

Period Key Events

1993 Financing for Utility Vehicles of M&M started

1995 First branch opened outside Mumbai, at Jaipur

1998 Pilot project for retail tractor financing commenced

2001 Total Assets crossed Rs.10 billion mark

2002Senior and Tier II debt obtained from International Finance Corporation,Washington

2004Non-convertible debentures listed on The Bombay Stock Exchange Ltd. inthe wholesale debt market segment

2005 Mahindra Insurance Brokers Ltd. became a 100% subsidiary

2006 Company listed on Bombay Stock Exchange and National Stock Exchange

2007 Crossed 400 branches across India

2008Mahindra Rural Housing Finance Ltd. IncorporatedMobilized Rs.4.14 billion through allotment of equity shares vide privateplacement

Source: Company, JM Financial.


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Financial Tables

Profit & loss statement (Rs mn)

Y/E March FY08 FY09 FY10E FY11E FY12ENet Interest Inco me (NII) 7,655 8,692 9,816 11,189 12,911

Non-Interest Income 53 56 59 62 65

Total Inco me 7,708 8,748 9,875 11,251 12,976Operating Expenses 2,525 2,668 3,073 3,398 3,818

Pre-provisi oning Profits 5,183 6,080 6,802 7,853 9,158

Loan Loss Provisions 2,463 2,824 2,601 3,049 3,550

Other Provisions 0 0 0 0 0

Total Provi sions 2,463 2,824 2,601 3,049 3,550

PBT 2,720 3,256 4,200 4,804 5,608

Tax 950 1,111 1,428 1,633 1,907

PAT (Pre-Extr a ord inar ies) 1,770 2,145 2,772 3,171 3,701

Extra ordinaries (Net of Tax) 0 0 0 0 0

Report ed Profi ts 1,770 2,145 2,772 3,171 3,701

Dividend 510 624 814 936 1,091

Retained Profi ts 1,260 1,522 1,959 2,235 2,610


Balance sheet (Rs

Y/E March FY08 FY09 FY10E FY11E FY12EEquity Capital 953 957 957 957 9

Reserves & Surplus 12,176 13,722 15,680 17,915 20,5

Stock Option Outstanding 14 13 14 14 Borrowed Funds 50,425 52,130 64,120 75,982 89,6

Deferred tax liabilities 0 0 0 0

Current Liabilities 6,651 7,617 9,157 10,755 12,6

Total Liab il iti es 70,218 74,439 89,928 105,624 123,7

Loans & Advances 66,435 68,383 83,428 97,610 114,2

Investments 31 1,097 1,001 1,464 1,7

Intangible Assets 13 18 15 17

Cash & Bank Balances - CA 2,153 2,763 3,170 4,051 5,0

Other Current Assets - CA 24 33 12 10

Fixed Assets 307 357 413 464 5

Miscellaneous expenditure 0 0 0 0

Deferred Tax Asset 1,254 1,788 1,888 2,007 2,2

Total Ass ets 70,218 74,439 89,928 105,624 123,7Source: Company, JM Financial.

Key ratios (%)

Y/E March FY08 FY09 FY10E FY11E FY12EGrowth (YoY) (%)

Borrowed Funds 2.1% 3.4% 23.0% 18.5% 18.0%

Advances 13.3% 2.9% 22.0% 17.0% 17.0%

Total Assets 11.8% 6.0% 20.8% 17.5% 17.2%

NII 48.3% 13.5% 12.9% 14.0% 15.4%

Non-Interest Income 214.5% 6.0% 5.0% 5.0% 5.0%

Operating Expenses 29.2% 5.6% 15.2% 10.6% 12.3%

Operating Profits 60.8% 17.3% 11.9% 15.5% 16.6%

Core Operating Profits 60.8% 17.3% 11.9% 15.5% 16.6%

Provisions 106.1% 14.7% -7.9% 17.2% 16.5%

Reported PAT 33.2% 21.2% 29.2% 14.4% 16.7%

Margins (%)

Interest Spread (%) 9.60% 9.63% 9.89% 9.31% 9.10%

NIM (%) 11.74% 12.34% 12.28% 11.73% 11.52%

Profitability (%)

ROA (%) 2.66% 2.97% 3.37% 3.24% 3.23%

ROE (%) 16.9% 15.4% 17.7% 17.9% 18.3%

Cost to Income (%) 32.8% 30.5% 31.1% 30.2% 29.4%

Ass ets Qu alit y (%)

Gross NPAs (%) 7.97% 9.42% 8.62% 8.41% 8.30%

Specific LLP (%) 3.94% 4.19% 3.43% 3.37% 3.35%

Capital Adequacy (%)

Tier I (%) 16.80% 17.30% 16.55% 16.26% 16.04%

CAR (%) 20.70% 19.40% 18.47% 18.06% 17.73%


DuPont Analysis (%)

Y/E March FY08 FY09 FY10E FY11E FY12ENII / Assets (%) 11.51% 12.02% 11.94% 11.44% 11.26

Other income / Assets (%) 0.08% 0.08% 0.07% 0.06% 0.06

Total Income / Assets (%) 11.59% 12.09% 12.02% 11.51% 11.31

Cost to Assets (%) 3.80% 3.69% 3.74% 3.48% 3.33

PPP / Assets (%) 7.79% 8.41% 8.28% 8.03% 7.99

Provisions / Assets (%) 3.70% 3.90% 3.17% 3.12% 3.10

ROA (%) 2.66% 2.97% 3.37% 3.24% 3.23


Valuations

Y/E March FY08 FY09 FY10E FY11E FY12EShares in issue (mn) 95.3 95.7 95.7 95.7 95

EPS (Rs.) 18.6 22.4 29.0 33.1 38

EPS (YoY) (%) 17.5% 20.6% 29.2% 14.4% 16.7

PE (x) 18.6 15.4 11.9 10.4 8

BV (Rs.) 138 153 174 197 2

P/BV (x) 2.51 2.26 1.99 1.75 1.

DPS (Rs.) 5.4 6.5 8.5 9.8 11

Div. yield (%) 1.5% 1.9% 2.5% 2.8% 3.3



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#Notes


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#Notes


23/24



#Notes


24/24


JM Financial Institutional Securities Private LimitedMEMBER, BOMBAY STOCK EXCHANGE LIMITED AND NATIONAL STOCK EXCHANGE OF INDIA LIMITED

51, Maker Chambers III, Nariman Point, Mumbai 400 021, India.

Board: +9122 6630 3030 | Fax: +91 22 6747 1825 | Email: [email protected] | www.jmfinancial.in

Analyst Certification

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that:

All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

Analyst(s) holding in the Stock: (Nil)

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This research report has been prepared by JM Financial Institutional Securities Private Limited (JM Financial Institutional Securities) to provide information about the

company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its affiliated companies solely for the purpose of information of the select recipien

of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written consent of JM FinancialInstitutional Securities. This report has been prepared independently of the companies covered herein. JM Financial Institutional Securities and/or its affiliated entities are a

multi-service, integrated investment banking, investment management and brokerage group. JM Financial Institutional Securities and/or its affiliated company(ies) might have

lead managed or co-managed a public offering for the company(ies) covered herein in the preceding twelve months and might have received compensation for the same during

this period for the services in respect of public offerings, corporate finance, investment banking, mergers and acquisitions or other advisory services in a specific transaction. JMFinancial Institutional Securities and/or its affiliated company(ies) may receive compensation from the company(ies) mentioned in this report within a period of three to six

months' time following the date of publication of this research report for rendering any of the above services. Research analysts and Sales Persons of JM Financial Institutiona

Securities may provide important inputs into the investment banking activities of its affiliated company(ies) or any other firm or company associated with it.While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred toherein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may not be in any way responsible for an

loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for information only and is no

intended to be and must not alone be taken as the basis for an investment decision. The investment discussed or views expressed herein may not be suitable for all investorsThe user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities

reserves the right to make modifications and alterations to this statement as they may deem fit from time to time.

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