mmfs

7/31/2019 MMFS

1/36www.morganmarkets.

Asia Pacific Equity Research19 January 2012

Mahindra & Mahindra FinancialServices

Initiation

UnderweightMMFS.NS, MMFS IN

A strong franchise, but macro headwinds are buildingup

Price: Rs672.00

Price Target: Rs600.00

India

India NBFCs

Saurabh KumarAC

(91-22) 6157-3590

[email protected]

J.P. Morgan India Private Limited

Gunjan Prithyani

(91-22) 6157-3593

[email protected]


Seshadri K Sen, CFA

(91-22) [email protected]


Josh Klaczek

(852) 2800-8534

[email protected]

J.P. Morgan Securities (Asia Pacific) Limite

YTD 1m 3m 12mAbs 7.1% 4.9% 4.2% 5.3%Rel 1.0% -2.2% 7.5% 18.1%

Mahindra & Mahindra Financial Services (Reuters: MMFS.NS, Bloomberg: MMFS IN)

Year-end Mar (Rs in mn) FY10A FY11A FY12E FY13EOperating Profit (Rs mn) 7,420 8,592 10,685 14,283Net Profit (Rs mn) 3,426 4,631 5,370 6,831Cash EPS (Rs) 35.7 45.2 52.4 59.0DPS (Rs) 7.6 10.2 11.5 13.0EPS growth (%) 59.4% 26.6% 15.9% 12.6%ROE 21.4% 22.0% 20.0% 19.3%P/E 18.8 14.9 12.8 11.4P/BV 3.7 2.8 2.4 1.9Source: Company data, Bloomberg, J.P. Morgan estimates.

Company Data52-wk range (Rs) 840.00 - 590.0Market cap ($ mn) 1,37Price (Rs) 672.0Date Of Price 19-Jan-13mth Avg daily volumeAverage 3m Daily Turnover($ mn)

1.5

BSE30 16,46Exchange Rate 50.7

See page 34 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware ththe firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singfactor in making their investment decision.

500

600

700

800

Rs

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

Price Performance

MMFS.NS share price (Rs

BSE30 (rebased)

MMFS enjoys a strong franchise in the auto financing NBFC space. Overthe last few years, it has been a key beneficiary of rising rural spends

which have enabled it to grow its loan book by 36% over FY09-12E.

Incrementally, however, we see a moderation in rural economic growth.Hence, credit costs which are at cyclical lows will probably move up and

growth should moderate a bit. On the upside, rate cycle seems to have

peaked and any sharp downtick hereon will be a positive but this we

believe is probably better played on some beaten down names. Valuationsat 2.4x/1.9x FY12/13E P/B, are at a relative premium to peer group. Our

Mar-13 PT at Rs600 implies 10% downside from current levels. We will

become more constructive, if either valuations become more

accommodative or asset quality continues to hold up despite macrochallenges for another few Qs.

Outlook for rural economy points to softness ahead: On balance, whilewe are constructive on the rural demand story in the medium term; in FY13,we see challenges emanating from a) slowing government spends givenconstraints on fiscal situation and b) increased pressure on farm marginsgiven rising input costs.

Macro offers multiple challenges, though MMFS has withstood themwell so far: Product diversification/scope for market share improvement, inour view, allows MMFS to counter auto sales slowdown. Tighteningregulatory norms for NBFCs are likely to impact profits/capital position a

bit. The company, however, appears to be well placed to benefit from any

reversal in rate cycle and could claw back some part of ~80bps of fundingcost it hasnt passed onto customers. Credit costs for MMFS continue to beat cycle low levels, though we assume some deterioration hereon.

Valuations, PT: MMFS currently trades at 1.9x FY13E book with forwardROEs of 19-20%. The premium valuations in part reflect asset quality forthe business, which has continued to hold up, and growth rates that are faroutpacing the industry. Our Mar13 PT of Rs600 (COE=15%, ROE=20%) is

based on 1.7x forward book at 10% discount to its post 2009 trading range.Key upside risks: a) earlier than anticipated sharp reversal in rates; b)sustained buoyancy in rural markets and c) asset quality holding up.

7/31/2019 MMFS

2/36

2

Asia Pacific Equity Research

19 January 2012Saurabh Kumar(91-22) [email protected]

Company Description P&L sensitivity metrics FY12E ROA FY12E ROE

impact (%) impact (%)

Mahindra & Mahindra Financial services (MMFS) isa leading non banking finance company catering torural and semi urban markets. MMFS is primarilyengaged in providing financing for new and pre-owned auto, utility vehicles, tractors, cars andcommercial vehicles. MMFS is a part of Mahindragroup, which is one of the largest conglomerates inIndia. M&M Auto sales account for ~30% of MMFSfinancing portfolio.

NIMsImpact of each 10bps 0.07% 0.4%

Cost to Income

Impact of each 10bps 0.07% 0.4%

Source: J.P. Morgan estimates

Price target and valuation analysisInitiate with Underweight. Our Mar13 PT of Rs600 is based on 1.7x FY13 book.Our normalized ROE assumption is based on NIMs of 10.5% and credit costs (at1.9%) which are higher by 50bps vs. current levels.

Key upside risks include a) an earlier than anticipated sharp reversal in rates; b)sustained buoyancy in rural markets and c) asset quality holding up well.

Valuation Assumptions

O/S loan book (as of Jun-11) Risk free rate 8.7%Equity risk premium 6%Beta 1.2Cost of Equity 15.0%Terminal growth 11%Stage 2 growth 14%Mar-13 Price Target 600

Normalized ROENII/AUM 10.5%Cost to income 3.7%Provisions/AUM 1.9%ROA 3.2%

Source: Company

EPS: J.P. Morgan vs consensusROE 20%

J. P. Morgan Consensus

FY12E 52.4 55.8FY13E 59.0 68.6Source: Bloomberg, J.P. Morgan estimates

Loans (Onbooks)124,650

90%

Off books(securitization)

10%

7/31/2019 MMFS

3/36

3



Table of Contents

Investment thesis .....................................................................5Growth is likely to moderate in rural economy.........................................................5

Asset quality is at cyclical low levels; we expect some worsening incrementally ......6

Market share gain/new segment diversification offer opportunities to more thanoffset macro growth concerns..................................................................................7

Regulatory norms will impact headline numbers but impact is technical and notlikely a big stock catalyst.........................................................................................8

Rates have likely peaked. Timing and extent of rate cut are more important fromstock price perspective ............ ............. ............. .............. ............. ............. ............. .8

Capital adequacy currently is healthy. However it is consuming capital fast- Maylook to dilute in FY13. ............ ............. ............. .............. ............. ............. ............. .9

SWOT analysis........................................................................11

Valuation and share price analysis.......................................12

Normalized ROE of 20%................ ............. ............. ............. ............. .............. .....12

Share price performance........................................................................................12

Valuations 1.9x P/B levels are in line with average of post GFC trading range....13

Business outlook....................................................................15

Outlook for rural economic growth seems sedate ............. ............. ............. ............ 15

Market share gains, new growth segments should help offset slowdown in auto sales.............................................................................................................................17

Asset quality improvement driven by new product lines and better collectionefficiency..............................................................................................................19

Strong parentage offers brand recall and synergistic benefits.............. ............. ...19Established track record with a wide branch network and dealer tie ups................. .21

Capital adequacy is strong. But since co is consuming capital fast, it may need todilute in FY13.......................................................................................................21

Regulatory uncertainty persists. However, company should be able to withstand theheadwinds.............................................................................................................22

NIM compression imminent given growth in lower yield segments and increasedfunding costs.........................................................................................................24

Business and management brief ..........................................26

Financial Analyses .................................................................29

Mahindra & Mahindra Financial Services: Summary of financials.................. ........33

Earnings estimates for the

company have been going upbut there have been some cuts

at the margin

Rural growth slowing at the

margin; longer term outlookalbeit remains positive

Dec-11 Sales% ch Y/Y

Bajaj Auto DomesticSales 3%TVS Motors DomesticSales -2%Mahindra Tractor Sales

0%

Valuations in line with post GFC

trading range

Capital raise may be required in

FY13E

Source: Bloomberg, J.P. Morgan estimates,

Company reports

1.0

1.5

2.0

2.5

3.0

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

Avg - 1.9x

17.30%16.10%

17.00%

14.2%

2.10% 2.40%3.30%

2.1%

0.00%

4.00%

8.00%

12.00%

16.00%

20.00%

FY09 FY10 FY11 FY12E

Tier I Tier II

7/31/2019 MMFS

4/36

4



Initiate with Underweight; Price Target Rs600

We initiate on Mahindra Finance with Underweight rating and Mar-13 PT of

Rs600/share. This is a relative sector UW vis-a-vis stock positioning in the financialsspace. While we like the strong business model of the company and its positioning

in the semi urban/rural business on a medium term basis; for FY13 , we see a

slowing rural macro as a key overhang on the business. Further, we think a rate cut

story can be played better by looking at more beaten down names within the peer

group.

The PT implies 1.7x FY13E P/B and is derived from a 3 stage Gordon Growth model

based on a normalized ROE of 20% with a COE of 15%. This implies a 10%

discount to the post 2009 trading range for the company. Our normalized ROE

assumption is consistent with last 3 years historical and forecast realized returns for

the business.

Key upside risks to our rating and price target are a) earlier than anticipated sharp

reversal in rates; b) Sustained buoyancy in rural markets and; c) Asset quality

continues to hold up well.

Table 1: MMFS - Key financial forecasts

FY10 FY11 FY12E FY13ENIM (%) 12.7% 12.0% 10.6% 10.4%GNPA (%) 6.1% 4.4% 3.7% 3.9%ROA (%) 4.1% 4.1% 3.2% 3.0%ROE (%) 21.4% 22.0% 20.0% 19.3%EPS (Rs/share) 35.7 45.2 52.4 59.0

Source: Company reports and J.P. Morgan estimates.

Figure 1: MMFS - Valuation AssumptionsMar-13 Price Target 600Cost of Equity 15.0%Normalized ROE 20%Terminal growth 11%Stage 2 growth 14%

Source: J.P. Morgan estimates.

Figure 2: MMFS - ROA trends (%)


Figure 3: MMFS- ROE trends (%)


2.5%

2.9%

4.1%4.1%

3.2%

3.0%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

FY08 FY09 FY10 FY11 FY12E FY13E

15.4%

21.4%

22.0%

20.0%

19.3%

14.0%

16.0%

18.0%

20.0%

22.0%

FY09 FY10 FY11 FY12E FY13E

7/31/2019 MMFS

5/36

5



Investment thesis

Growth is likely to moderate in rural economy

The last couple of years have been exceptionally good for rural economic buoyancy

driven by fiscal measures and programs such as MNREGA, good monsoons and

improvement in farm productivity. This in turn has aided growth for semi urban-

rural financing companies like MMFS.

Going ahead, however, outlook for rural economic growth looks sedate. Margins in

the farm sector are getting compressed due to rising cost of fertilizers/seed and labor.

Further, inflation/ fiscal deficit will likely prompt the government to curtail

expenditure growth. Added to this is a high base effect of last two years growth and

inherent unpredictability of monsoons. Hence, growth rates of the past might not be

achievable in FY13.

This is becoming evident in the commentary from OEMs and FMCG players. In

Dec-2011, Bajaj Auto and TVS Motors and Maruti reported sedate domestic sales

trends and Mahindras tractor sales were flat Y/Y.

Table 2: Monthly Sales Trends (In unit nos)

Dec-11 Dec-10 %YoY Nov-11 %MoM FY12YTD FY11YTD % YTDBajaj Auto Domestic Sales 185,982 181,415 3 245,221 (24) 2,099,986 1,947,859 8TVS Motors Domestic Sales 146,747 149,357 (2) 148,558 (1) 1,441,811 1,319,998 9Mahindra Tractor Sales 16,389 16,334 0 17,527 (6) 183,300 154,266 19Maruti Domestic Sales 77,475 89,469 (13) 82,870 (7) 6,84,892 8,20,350 (17)

Source: Companies

Having noted this, on a longer term basis, in our view, the rural farm sector is likelyto remain a focus area for the government and fiscal stimuli may keep coming in

some form or other. Tabling of the recent food security bill, mandatory increases in

minimum support prices (MSP) and enhanced compensation demanded for farmers

in the land acquisition bill are just a few points which support this case.

Hence, on balance, while we are constructive on a medium term basis on the

rural demand story; for FY13 we see challenges emanating from slowing fiscal

spends , pressure on farm margins given rising input costs, which would likely

moderate rural business growth.

7/31/2019 MMFS

6/36

6



Historical drivers of rural spend

Figure 4: Nominal rural wages pre and post NREGA

Source: Ministry of Statistics and Program Implementation

Figure 5: Real rural wages trends


Figure 6: Trends in MSP of Wheat and Paddy


Figure 7: Monsoons have been near normal levels in India last year


Asset quality is at cyclical low levels; we expect someworsening incrementally

Going back into history, MMFS had consistently clocked GNPA levels of 7-8%,

which have since come down, thanks to rural economic growth. Diversification out

of core tractor business into lower NPA segments like Cars/ UVs have also helped

the asset quality.

However, in our view, current credit costs for the company are currently at near cycle

low levels. Going ahead, we expect some increase given an overhang of rural growth

moderation. Till now, to its credit, the company hasnt shown any signs of stress

11%

4% 4% 4%0%

2% 2%

9%

20%

21%

11%

0%

8%

7%8%

5% 5%3%

0%2%

9%

21%

18%

8%

4%

15%

0%

5%

10%

15%

20%

25%

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

Paddy MSP % c h Y/Y Wheat MSP % ch Y/Y

7/31/2019 MMFS

7/36

7



herein which is a marked variance from other peers /banks. For our normalized

ROE calculation, we work with 1.9% credit cost, which is almost at 40bps

premium to current credit cost levels.

Figure 8: MMFS - Gross NPA and NPA (%)- current levels combination of cyclicality andstructural change away from tractors


Market share gain/new segment diversification offer

opportunities to more than offset macro growth concerns

MMFS has been steadily diversifying into newer segments of auto financing over the

last few years. This diversification has enabled the company to counter slowdown in

specific parts of the auto industry and compensate with market share gains in new

growth areas. Asset quality has also improved for the company as a result of this and

overall buoyancy in rural markets.

Over 1HFY12, MMFSs loan book growth of 45% has far outpaced industry growth,

highlighting the resilience of the business. Going ahead, while industry sales are

likely to show some moderation and so would MMFS, growth rate for the company

should be better than industry average.

Table 3: MMFS: Product Segments and yields

Avg. financingYields

JPM FY13 industrygrowth outlook

Outlook for MMFS sales

Utility Vehicle(UVs)

17-19% 12-14% In line with parent company sales. This should register above industry growth on new product launches byM&M

Cars 15-18% 12-14% Better than industry. Targeting higher share here on tie ups with new entrants in rural markets likeVolkswagen, Hyundai, Tata etc. Historically, Maruti accounted for majority of portfolio (75-80%) herein

Tractors 18-21% 10-12% In line with parent. Tractor growth rates should moderate to 10-12% levels. Recent datapoints on slowdownin Nov/Dec have been concerning

CommercialVehicles (CVs)

14-16% 10-12% Better than industry. Newer segment and hence lower base. Company expects market share to increasegiven low base and M&M rural footprint. It expects CV share to increase to 15% from c11% of overall portfolioover the next 2-3 years. Overall industry numbers are likely to be below historical avg given sluggish IIPtrends .

Pre-Owned 22-23%+ NA Better than industry. Newer segment. Company expects market share to increase given low base and M&Mrural footprint. It expects pre owned vehicle share to increase to 10% from c6% of the portfolio over the next 2-3 years.

Source: Company, J.P. Morgan

7.5% 7.7%

6.4%

4.8%5.5%

7.6%

8.7%

6.4%

4.0% 3.7% 3.9%

2.8%3.7%

3.2%2.3% 2.5%

2.9% 2.6%

0.9% 0.6% 0.7% 0.9%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13EGNPA (%) Net NPA (%)

7/31/2019 MMFS

8/36

8



Regulatory norms will impact headline numbers but impactis technical and not likely a big stock catalyst

Regulations are a big overhang on the NBFC sector in general. Specifically for

MMFS the key regulations that would impact its business would be:

1. Introduction of a 90-day NPA recognition norm and tightening of

provisioning requirements;

2. No credit enhancements being offered on assignment transactions and;

3. Ensuring Tier 1 capital at minimum at 12% with overall CAR at 15%.

Impact: Regarding 90-day norm, if it comes through, the NPA levels (even though

technical) are likely to move up by 100-150bps and would then impact earnings by

5% downwards. Regarding securitization and Tier 1 capital, we think MMFS iscomfortable on both those accounts as off balance sheet portfolio was never a big

funding source for the company (10% of assets) and FY12E tier 1 capital at 14.2% is

comfortably above regulatory norms. There could likely be a marginal hit to the

companys Tier 1 capital, if securitization shifts to PTC route as opposed to direct

assignments.

We note that most of these suggested norms are already in the public domain and as

such market has taken cognizance of the same. NBFCs are currently trying to reason

with RBI for some concessions. Further, even if the regulations come in, NBFCs will

likely get a reasonably long (1-3 years) time frame to implement it, thus cushioning

any impact.

As such this overhang, in our view, is looking at the rear view mirror and since closeto worst combination is already known it can be priced in.

Rates have likely peaked. Timing and extent of rate cut are

more important from stock price perspective

Given the growth inflation trade off, in its last policy RBI has stuck to a dovish tone

indicating that from this point on, monetary policy actions are likely to reverse the

cycle, responding to the risks to growth. Looking at the forward market, short end

of the curve (overnight rates) are now forecasting a sharp 140bps cut over the next 12

months.

J.P. Morgan economists, however, expect a pause till April and currently do not

believe that sharp rate cuts may come through. Extent and timing of rate cuts thenare likely to be important for stock performance hereon. In our assumptions we are

factoring in a 50bps cut in FY13.

Table 4: Overnight rate expectations

Fall expected in wholesale financing rates over next 12 months12M swap 8.0 -140Overnight 8.7

Source: Bloomberg, J.P. Morgan

7/31/2019 MMFS

9/36

9



Table 5: MMFS - NIM Sensitivity to rates

FY13 NIM (%)

100bps 10.5%50bps 10.4%0bps 10.3%


Capital adequacy currently is healthy. However it isconsuming capital fast; May look to dilute in FY13E

MMFS's capital adequacy is strong at 23.3% (as of FY11) and comfortably above

regulatory CAR requirement of 15%. However, given growth in asset base, the

company is consuming capital fast, and we believe might need to raise capital. We

estimate it would need to raise Rs8B to get back its FY13 tier 1 to 17% (historical

average), which would otherwise fall below 14%.

We note that in the interim, the company has additional levers to fund growth, i.e.raising of tier 2 capital, which is currently low at 3.3%, and resorting to additional

securitization, which the company has held back due to regulations.

Figure 9: MMFS - Capital Adequacy ratios


17.30%16.10%

17.00%

14.2%

2.10% 2.40%3.30%

2.1%

0.00%

4.00%

8.00%

12.00%

16.00%

20.00%


Tier I Tier II

FY13 may require a

capital raise to sustainthe growth

7/31/2019 MMFS

10/36

10



MMFS trades at a premium to sector on relative valuations

Post 2008 GFC, MMFS has traded at an average P/B valuation of 1.9x. MMFSs

current valuation at 1.9x forward P/B is in line with the aforesaid trading range. Froma risk reward perspective, the stock has traded between 1.1-1.9x forward P/B, which

then places it at the mid point of the post GFC trading range.

Relative to sector and auto financing NBFCs, however, the company trades at a

marked premium despite its ROE not being far better than peer group. Valuation in

this context then looks a bit stretched, in our view.

Figure 10: NBFC Valuations (FY13 P/B)

Source: J.P. Morgan estimates, Bloomberg

Figure 11: MMFS - Average trading range post GFC

Source: Company, J.P. Morgan estimates, Bloomberg

SHTF

LICHF

MMFS

IDFC

RECPOWF

GICHF

DEWH

SUF

0.5

1.0

1.5

2.0

2.5

10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 26.0

1.01.2

1.41.6

1.82.0

2.22.4

2.6

2.83.0

Ma y-09 Aug-09 Nov -09 Feb-10 M ay -10 Aug-10 Nov -10 F eb-11 M ay -11 Aug-11 Nov -11

Average - 1.9x

7/31/2019 MMFS

11/36

11



SWOT analysis

Strength

One of the leading players in the auto financing market

with strong parent (Mahindra). The company has 570

offices covering 24 states / 4 union territories, with over

1.7million vehicle finance customer contracts since

inception.

Exposure primarily to rural and semi urban market where

cashflow buoyancy has ensured growth and sound asset

quality.

Contribution from parent business (M&M) sales. 30% of

the company's business comes from Mahindra sales.

Diversification in newer segments ensures higher than

industry average growth given low base and companys

existing rural footprint.

Weaknesses

Funding costs face upside pressures. Company till date has

had to absorb around 80bps of funding cost increase which

it hasnt passed on to customers.

Slowdown in certain sectors of auto sales like tractors and

cars might pressure loan growth near term.

Monsoons can have a significant impact on rural sector

cash flows and as such a weak monsoon can be challenging

for asset quality.

Opportunities

Implementation of new government policies to aid rural

consumption on the lines of NREGA (i.e. Food Security

Bill, Higher compensation for land under proposed Land

Acquisition Act).

Entry into newer segments such as CVs and pre owned

vehicles.

Up-scaling of average loan ticket size by upgrading to a

higher ticket size market.

Diversification out from Mahindra into newer

manufacturers especially in cars to offset a slowdown

there.

Longer term value accretion from subsidiaries i.e. Rural

housing finance, Insurance broking , USA LLC and in

house BPO.

Threats

Regulation especially on account of transitioning to a 90-

day NPA norm and securitization guidelines which

effectively means direct assignment transactions will be

difficult to close.

Competition from other NBFCs and Banks exists, but we

dont think it is serious enough at this stage to challenge

MMFSs core business growth currently.

7/31/2019 MMFS

12/36

12



Valuation and share price analysis

Normalized ROE of 20%

We are working with a normalized ROE of 20% compared to last 2-year average

levels of 21.7%. On our assumptions current low levels of credit costs are far below

cycle average and hence will likely inch up. There is however some scope for

improvement via operating cost efficiencies and NIM expansion which have been

under pressure given spate of rate hikes.

Table 6: MMFS - ROE assumptions

Normalized ROE Normalized FY12E FY13E

NIM 10.50% 10.6% 10.4%

Opex -3.70% -4.1% -4.0%

Provisions -1.90% -1.5% -1.7%

PBT 4.9% 4.9% 4.6%

PAT 3.2% 3.2% 3.0%

Leverage 6.25 6.2 6.4

Normalized ROE 20% 20% 19%


Share price performance

MMFS's stock has seen sharp re-rating post the 2008 GFC meaningfully

outperforming the broader markets. This is on the back of strong loan growth and

historic low NPA levels reported by the company over the last two years. The stock

is closely correlated to the performance of the rural economy, which has been good

over the past two years on the back of NREGA scheme and favorable monsoon.

Recent share price performance (over last one month) has been weak on a relative

basis due to the slowdown in the auto industry and funding pressures. Parent M&M

also reported sluggish tractor sales numbers for Nov/Dec, which has led to some

concerns on weakening rural demand. These concerns coupled with regulatory

headwinds (securitization norms/NPA recognition cycle) could continue to weigh on

the stock price in the near term, in our view.

Figure 12: MMFS - Relative share price performance to Sensex

Source: Bloomberg

-50

100150200250300350400450

6/1/2006

9/1/2006

12/1/2006

3/1/2007

6/1/2007

9/1/2007

12/1/2007

3/1/2008

6/1/2008

9/1/2008

12/1/2008

3/1/2009

6/1/2009

9/1/2009

12/1/2009

3/1/2010

6/1/2010

9/1/2010

12/1/2010

3/1/2011

6/1/2011

9/1/2011

12/1/2011

MMFS Sensex

7/31/2019 MMFS

13/36

13



Table 7: MMFS & M&M share price performance

1M 3M 6M 12MMMFS 1.8 4.2 (4.0) 5.3

M&M 6.9 (13.2) (2.2) (4.2)

Source: Bloomberg

Valuations 1.9x P/B levels are in line with average of postGFC trading range

Post GFC, MMFS has traded at an average P/B multiple of 1.9x. MMFSs current

valuations (at forward P/B of 1.9x) are in line with the aforesaid average trading

range. From a risk reward perspective, the stock historically has bottomed out at 1.1x

book and peaked at 2.9x forward book. Current valuations then place it broadly near

the mid point of that range.

Figure 13: Post GFC, Average P/B valuation range

Source: Company, Bloomberg, J.P. Morgan

Figure 14: Historical P/B Valuation range

Source: Company, Bloomberg, J.P. Morgan.

Figure 15: Historical P/E Valuation range

Source: Company, Bloomberg, J.P. Morgan

1.0

1.21.4

1.6

1.8

2.0

2.22.4

2.62.8

3.0

Ma y-09 Aug-09 Nov -09 Feb-10 M ay -10 Aug-10 Nov -10 F eb-11 M ay -11 Aug-11 Nov -11

Average - 1.9x

0.8

1.2

1.6

2.0

2.4

2.8

3.2

3/1/2006

8/1/2006

1/1/2007

6/1/2007

11/1/2007

4/1/2008

9/1/2008

2/1/2009

7/1/2009

12/1/2009

5/1/2010

10/1/2010

3/1/2011

8/1/2011

1/1/2012

P/B Mean Mean - 1SD Mean + 1SD

Mean - 1.8x

4.0

6.0

8.0

10.0

12.0

14.0

16.0

3/31/2006

8/31/2006

1/31/2007

6/30/2007

11/30/2007

4/30/2008

9/30/2008

2/28/2009

7/31/2009

12/31/2009

5/31/2010

10/31/2010

3/31/2011

8/31/2011

P/E Mean Mean - 1SD Mean + 1SD

Mean - 10.3x

7/31/2019 MMFS

14/36

14



Relative to other NBFCs, MMFS on a P/B vs. ROE framework, falls above the

relative value range. While premium relative to peers is partly attributable to solidasset quality and loan growth trends registered by the company; we believe

valuations at current levels appear stretched especially as RoEs are not far superior

relative to its peers.

Further, MMFS is also trading at a premium (20-30%) to private sector banks

(ICICI/Axis Bank). The valuation premium, on P/B basis, for the company (relative

to banks) is on the higher end of the historical trading range.

Figure 16: Valuations FY13 P/B vs. RoE

Source: Company, Bloomberg, J.P. Morgan estimates.

Figure 17: MMFS P/B valuation relative to Axis Bank

Source: Bloomberg, J.P. Morgan estimates

Figure 18: MMFS P/B valuation relative to ICICI Bank

Source: Bloomberg, J.P. Morgan estimates

Table 8: Indian NBFC Valuations

Mkt Cap Price/book RoE P/E Earnings growthName US$MM FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

MMFS 1,369 2.3 1.8 20.0 19.3 12.6 11.2 16% 13%Shriram Transport 2,472 2.0 1.7 24.1 21.8 9.4 8.5 7% 10%LIC Housing Finance 2,368 2.4 2.0 21.9 23.9 11.9 9.0 2% 32%HDFC 19,902 5.0 3.9 22.4 22.0 23.7 20.2 18% 17%IDFC 3,406 1.5 1.4 13.1 13.3 11.5 10.2 16% 12%REC 3,335 1.1 1.0 20.3 20.8 5.9 5.0 9% 18%POWF 4,026 1.0 0.9 15.3 16.2 7.2 5.6 -9% 29%GIC Housing Finance 92 0.9 0.8 14.2 16.5 6.6 5.1 -44% 31%Dewan Housing 426 1.2 1.0 18.4 20.4 6.9 5.3 27% 32%SUF 594 1.7 1.5 19.0 19.9 9.8 8.1 -22% 20%

Source: Company, Bloomberg estimates. Pricing as of Jan-18th close.

SHTF

LICHFMMFS

IDFC

RECPOWF

GICHF

DEWH

SUF

0.5

1.0

1.5

2.0

2.5

10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 26.0

0.4

0.6

0.8

1.0

1.2

1.4

8/1/2006

11/1/2006

2/1/2007

5/1/2007

8/1/2007

11/1/2007

2/1/2008

5/1/2008

8/1/2008

11/1/2008

2/1/2009

5/1/2009

8/1/2009

11/1/2009

2/1/2010

5/1/2010

8/1/2010

11/1/2010

2/1/2011

5/1/2011

8/1/2011

11/1/2011

MMFS/AXSB

0.4

0.6

0.8

1.0

1.2

1.4

1.6

8/1/2006

11/1/2006

2/1/2007

5/1/2007

8/1/2007

11/1/2007

2/1/2008

5/1/2008

8/1/2008

11/1/2008

2/1/2009

5/1/2009

8/1/2009

11/1/2009

2/1/2010

5/1/2010

8/1/2010

11/1/2010

2/1/2011

5/1/2011

8/1/2011

11/1/2011

MMFS/ICICIB

7/31/2019 MMFS

15/36

15



Business outlook

Outlook for rural economic growth seems sedate

The last couple of years have been exceptionally good for rural economic buoyancy

driven by fiscal measures and programs such as MGNREGA, good monsoons and

improvement in farm productivity. This in turn has aided growth for semi urban-

rural financing companies like MMFS.

However, near term outlook for rural economic growth appears sedate as

inflation/ fiscal deficit prompts the government to curtail expenditure growth.

Also, margins in the farm sectors are getting compressed given rising cost of

fertilizers/seed and labor. This along with a high base effect of last two years

growth and inherent unpredictability of monsoons imply that growth at

margins will likely moderate.

This is becoming evident in the commentary from OEMs and FMCG players. In

Dec-2011, Bajaj Auto and TVS Motors reported sedate domestic sales trends and

Mahindras tractor sales were flat y/y. Correspondingly, managements have lowered

volume guidance as well.

Table 9: Monthly Sales Trends (In unit nos)

Dec-11 Dec-10 %YoY Nov-11 %MoM FY12YTD FY11YTD % YTDBajaj Auto Domestic Sales 185,982 181,415 3 245,221 (24) 2,099,986 1,947,859 8TVS Motors Domestic Sales 146,747 149,357 (2) 148,558 (1) 1,441,811 1,319,998 9Mahindra Tractor Sales 16,389 16,334 0 17,527 -6 183,300 154,266 19

Source: Companies

Having said this, however on a longer term basis, the rural farm sector is likely toremain a focus area for the government. Tabling of the recent food security bill,

mandatory increases in minimum support prices (MSP) and enhanced compensation

demanded for farmers in the land acquisition bill are just a few points which support

this case.

On balance, while we are constructive on a longer term basis on the rural demand

story, for FY13, we see challenges emanating from slowing fiscal spends,

pressure on farm margins (rising input costs), which would likely slow down

near term rural growth.

What have been the historical drivers of consumption growth?

A brief look back at history might be instructive here to see the main propellers of

rural growth and assess risks for each of them. Over the last few years we find the

principal drivers of the rural economy (40%+ of Indias GDP) have been twofold i.e.

1. Fiscal stimuli (MGNREGA) that has helped push up wages andimprove mechanization- Advent of NREGA has resulted in a sharp

increase in rural wage inflation. Real rural wages have increased by 13%

Y/Y in 2011. The numbers pre and post NREGA are striking. Rural nominal

wages post NREGA (i.e. between 2006 and 2009) have registered a CAGR

of 9.7% Y/Y, a 3x increase compared to pre NREGA increase of just 2.7%

pa (i.e. b/w 1999-2006). Importantly, the desire to index NREGA wages to

7/31/2019 MMFS

16/36

16



inflation has effectively institutionalized the wage-price in the rural

economy.

Figure 19: Nominal rural wages pre and post NREGA


Figure 20: Real rural wages trends


Additionally, going ahead in 2012, the government has recently tabled the

Food Security Bill. This aims to enhance the scale and scope of food

subsidies across the country (75% of the rural population and 50% of urban

population). To implement this, a massive effort will be needed to procure

60-65 million tones (vs. c50-55 mt) of food grains to fulfill the mandated

requirement. Minimum support prices (MSPs) might then have to be

increased in order to incentivize production. Note that minimum support

prices of key crops i.e. paddy and rice for FY12 anyway have been hiked by

8%/ 15% Y/Y respectively and are higher than average increases done over

the last 10 years.

Figure 21: Minimum Support Prices for key crops on a rise

Source: Food Corporation of India

11%

4% 4% 4%0%

2% 2%

9%

20%

21%

11%

0%

8%

7%8% 5% 5%

3%

0%2%

9%

21%

18%

8%

4%

15%

0%

5%

10%

15%

20%

25%

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

Paddy MSP % ch Y/Y Wheat MSP % ch Y/Y

7/31/2019 MMFS

17/36

17



The main issue on hand then for FY13 is the financing of this fiscal stimuli.

Fiscal deficit / high inflation in India is constraining governments ability to

continue with such spends. Growth slowdown and correspondingly lowerrevenue numbers only add to such pressures and could keep additional

spending in check. Further, issues on lack of productivity of subsidy

schemes also remain. MGNREGA spends in 2012 have already moderated

to some extent.

In sum, while the rural economy will likely continue to be a focus area for

the government longer term, in the near term the governments ability to

finance any major fiscal program would be challenged and will likely lead

to growth moderation.

2. Favorable monsoon In 2011, the monsoon has turned out to be quite

favorable with a good spatial distribution across the country. Cumulative

rainfall over Jun-Sep was 2% above normal, with normal rains across most

of the India (ex- some parts of North Eastern region). This should then

ensure that cash flows due to crop harvest in 2011 should continue into at

least 1H12. However, given inherent unpredictability of this, an outlook on

2012 is difficult to provide here.

Figure 22: India Monsoon - Rainfall Distribution

Source: IMD

Market share gains, new growth segments should helpoffset slowdown in auto sales

MMFS has been steadily diversifying into newer segments of auto financing over thelast few years. The company has moved out of its traditional bastion of tractor/UV

financing business into newer markets such as cars, CVs and construction equipment.

Overall share of UV/tractor financing over time has fallen to 52% in FY11 from 62%

levels in FY05 and almost 100% prior to FY02.

This diversification has then enabled the company to counter slowdown in specific

parts of the auto industry and compensate with market share gains in new growth

areas. Asset quality has also improved for the company as a result of this.

7/31/2019 MMFS

18/36

18



Going ahead, while industry sales are likely to show some moderation, we believe

MMFS is likely to better industry growth rates on the back of market share gains

especially in car and CV financing. Over 1HFY12, the company's loan book growthof 45% has far outpaced industry growth, highlighting the resilience of the business.

Our industry growth outlook for specific business is listed below.

Table 10: MMFS: Product Segments and yields

Avg.financing

Yields

JPM FY13 industrygrowth outlook

Outlook for MMFS sales

Utility Vehicle(UVs)

17-19% 12-14% In line with parent company sales. This should register above industry growth on new productlaunches by M&M

Cars 15-18% 12-14% Better than industry. Targeting higher share here on tie ups with new entrants in rural marketslike Volkswagen, Hyundai, Tata etc. Historically, Maruti accounted for majority of portfolio (75-80%) herein

Tractors 18-21% 10-12% In line with parent. Tractor growth rates should moderate to 10-12% levels. Recent slowdown inNov/Dec has been a point of concern in an overall decent year

CommercialVehicles (CVs)

14-16% 10-12% Better than industry. Newer segment and hence lower base. Company expects market share toincrease given low base and M&M rural footprint. It expects CV share to increase to 15% fromc11% of overall portfolio over the next 2-3 years. Overall industry numbers are likely to be belowhistorical average given sluggish IIP trends

Pre-Owned 22-23%+ NA Better than industry. Newer segment. Company expects market share to increase given lowbase and M&M rural footprint. It expects pre owned vehicle share to increase to 10% from c6% ofthe portfolio over the next 2-3 years


Figure 23: MMFS - Segment wise AUM break up


38% 38% 33% 31% 29% 27%

25% 25%23% 23% 22% 20%

23% 24% 30% 31% 33% 35%

7% 7% 8% 9% 10% 12%7% 6% 6% 6% 6% 6%

0%

20%

40%

60%

80%

100%

FY08 FY09 FY10 FY11 FY12 FY13

Auto/ Utility Vehicles (M&M) Tractors (M&M) Cars and others (including non M&M)

Commercial vehicles and construction equipments Pre owned vehicles & others

7/31/2019 MMFS

19/36

19



Asset quality improvement driven by new product lines andbetter collection efficiency

Asset quality trends have witnessed meaningful improvement over the last two years

with gross non performing assets coming down to ~4% levels from highs of 8.7% in

FY09. This has been supported by following factors-

1. Product diversification- Shift in product mix to lower yield segments like

CVs, CE and cars is likely to result in NIM compression; however, these are

relatively low risk segments and provide comfort of better asset quality.

UVs/tractors (primarily M&M portfolio) now account for 52% of overall

loan book vs. 62% in FY05 and almost 100% prior to FY02.

2. Lower LTVs and better collection efficiency- Overall the company has

brought down the LTVs to 70% levels and higher focus has been placed on

improving recovery processes over the last few years. Technologicalimprovements coupled with NPA linked incentives for employees have

helped the company keep better control over collections and NPA levels.

3. Buoyant rural cashflows have also resulted in asset quality improvement.

MMFS made aggressive provisions for bad quality loans over FY08-09;

however robust rural economy led to loan upgrades with net NPA coming

down to 0.6% from 2.5-3% pre FY09. Correspondingly, provision coverage

has increased to >85% from 50% levels.

Overall retail asset quality has been better than historical trend thanks to rural

economy. Going ahead, we expect it to remain largely stable over the next 2 years

despite the shift to lower risk segments.

Figure 24: MMFS - GPA and net NPA trends

Source: Company, J.P. Morgan estimates

Strong parentage offers brand recall and synergisticbenefits

M&M, promoter of MMFS and flagship company of Mahindra Group, is one of the

leading players in automotive and farm equipment in semi urban and rural markets

with a presence of over 65 years. M&M has a strong presence in the utility vehicles

and tractor segment commanding a market share of 61% and 42% respectively.

M&Ms leadership position in UV and tractor segment offers synergistic benefits

with MMFS being the preferred financier for M&M sales in rural markets. Further,

5.50%

7.6%

8.7%

6.4%

4.0% 3.7% 3.9%

2.50% 2.9% 2.6%

0.9% 0.6% 0.7% 0.9%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

FY07 FY08 FY09 FY10 FY11 FY12 FY13

GNPA Net NPA

7/31/2019 MMFS

20/36

20



MMFS also enjoys strong brand recall and customer trust in these markets given the

long track record (65 years), local market knowledge and dealership network of the

parent (>1000 dealerships). MMFSs growth in tractor/UV segment has largely beentracking M&Ms volume trends.

Currently, MMFS accounts for ~30% of the parent's sales primarily coming from

UV/tractor segment; however this should continue to come down as company gains

market share in newer growth areas.

On the funding side, a strong parent also supports MMFS good credit ratings (AA+)

from rating agencies and thereby lowering cost of funds relative to competition.

Figure 25: M&M Long term volume trends

Source: Company

Figure 26: Tractor Sales Recent data points (over Nov/Dec) have been sedate

Source: Company

Table 11: M&M financial Services- Credit rating

Crisil Rating OutlookFixed Deposit Program FAAA StableShort tem Debt A1+ StableLong term and subordinated debt AA+ Stable

Brickwork Rating OutlookLong term and subordinated debt AA+ Positive

Fitch Rating OutlookLong term and subordinated debt AA+ (ind) Stable

Source: Crisil,, Fitch, Brickwork

123 133167

210 232272 294

326

457

567

664

758

0

100

200

300

400

500

600

700

800

2002 2003 2004 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

FY02-11 CAGR of 19%

28%

-9%

14%

27%

3%

29%

43%

31%

21%

37%

23%

14%9%

37%

15%

19%

41%

31%

-3%0%

-10%

0%

10%

20%

30%

40%

50%

0

5000

10000

15000

20000

25000

30000

35000

Tractor sales (units) % ch Y/Y

7/31/2019 MMFS

21/36

21



Established track record with a wide branch network anddealer tie-ups

MMFS has over 15 years of operating experience in rural and semi urban markets

and a widespread branch network of 570 branches spread across 24 states (30%

CAGR over past 5 years). Further, the company also has tie-ups for providing on

site financing to customers purchasing vehicle at various dealerships (like

Maruti/M&M).

Majority of the loan processes are fairly decentralized with loan origination,

approvals and collection being undertaken at branch level. This enables prompt

processing and better understanding of the local markets.

Figure 27: MMFS - Branch network

Source: Company

Capital adequacy is strong. But since company isconsuming capital fast, it may need to dilute in FY13E

MMFS's capital adequacy is strong at 23.3% (as at FY11end) and comfortably above

regulatory CAR requirement of 15%. However, given growth in asset base, the

company is consuming capital fast, and in our view might need to raise capital. We

estimate it may need to raise Rs 8B to get back its FY13 tier 1 to 17% (historical

average) which would other wise run down to 13.5%.

We note that in the interim, the company has additional levers to fund growth, i.e.

raising of tier 2 capital which is currently low at 3.3% and resorting to additional

securitization, where the company has been holding back given haziness around

regulations.

151

256

436459

547 570

0

100

200

300

400

500

600

FY02 FY05 FY08 FY10 FY11 Sep-11

7/31/2019 MMFS

22/36

22



Figure 28: MMFS - Capital Adequacy ratios


Regulatory uncertainty persists. However, company should

be able to withstand headwindsRBI has, over the last one year, been tightening regulatory norms for NBFCs to

increase the oversight of the sector. The measures taken or proposed are primarily

aimed to reduce regulatory gaps and arbitrage between banks and NBFCs and make

banks responsible for their own priority sector lending targets.

Various specific measures for the NBFC taken include-

1. Increase in capital adequacy for deposit taking NBFCs to 15% from 12% earlier

2. Declassification of loans to NBFCs (ex MFI) as priority sector loans thereby

resulting in increase in funding costs. This has been done with a view to

encourage banks to meet the targets on their own

3. Provisioning introduced on standard assets for 0.25%

In addition to these, various recommendation pending notification include-

4. Introduction of 90-day NPA recognition norm - Proposal to increase NPL

recognition cycle to 90 from 180 days, in line with the banks. This could have a

meaningful impact on provisioning costs and NPL ratios for MMFS given the

lumpy nature of rural cash flows. As per management, this can result in NPA

increase of 100-150bps. This while being more accounting impact should adjust

over a period of time but there will be initial bumpiness.

5. Higher provision requirement RBI is looking to increase the provisioning andreserve requirements for NBFCs to narrow the gap between banks and NBFCs.

MMFS has been following provisioning norms stricter than RBI mandated norms

and has high provision coverage ratio (+80% in FY11). This could then offset

some impact of higher provisioning requirement. A 90-day norm will most likely

impact provisioning in the first bucket (15% norm).

6. Increase tier 1 CAR to 12% - This, in our view, is not a big issue as MMFS has

been operating at a much higher Tier 1 ratio. Rating agencies also typically

mandate a much higher level of capital for NBFCs vs. regulatory requirements.

17.30%16.10%

17.00%

14.2%

2.10% 2.40%3.30%

2.1%

0.00%

4.00%

8.00%

12.00%

16.00%

20.00%


Tier I T ier II

FY13 may require acapital raise to sustainthe growth rate

7/31/2019 MMFS

23/36

23



7. Securitization norms RBI recently placed draft guidelines on securitization

(refer to table below for details). Overall the proposed norms are prima facie not

a big negative with the exception of disallowance of credit enhancement forassignment transactions. Further, there is no clarity as yet on qualification of

securitization as priority sector loans. While MMFS was not very aggressively

using this financing (10% of overall book), it did allow for some capital

management.

Overall, assuming 90-day norms come in and if NPAs rise by 150bps it will impact

our earnings estimates by approx 5%. Our estimates which are 7% below street

anyway allow for this.

Table 12: MMFS - Provisioning policy vs. RBI current norms for NBFC

Duration (months) RBI Norms Duration (months) MMFS>5 and 5 and 18 and 11 and 30 and 24 months 100%>54 months 50%

Source: Company

Table 13: Proposed norms for securitization

Proposed ImpactMinimum holding period Minimum holding period for loans with monthly payments is at 6 months vs. expectations of 12

months. This in order to encourage some seasoning of loans before they are sold off. Commonpractice was to season loans for 3-6 months anyway.

Minimum retention requirement Minimum retention requirement for loans with maturity of over 24 months is 10% and in our viewnot a big impediment. This is being done with the intention of making the originator have somestake in the loans it sells.

Due diligence of underlying loans As regarding due diligence of underlying loans, atleast 5% need to be verified by the banksofficers, in cases where it used services of third party firms. This in our view is a relief as carryingentire KYC on underlying portfolio was a big problem.

Prohibition of credit enhancement In case of bilateral assignments, the guideline prohibits credit enhancement or liquidity facilities.Normally these used to be 8-10% of the loan being sold. This could be a negative as banks maybe reluctant to buy loans with no credit enhancement by the originator (though the MRRrequirement takes care of the issue to some extent

Capital treatment of credit enhancement Capital treatment of credit enhancement being written off 50% from Tier 1 and 2 is slightly lenientvs. other markets where it is written off completely from Tier 1.

No clarity on priority sector qualification The guidelines have not provided all important clarity on if securitised loans will continue to beeligible for priority sector lending classifications for banks to meet their requirement

Source: RBI

7/31/2019 MMFS

24/36

24



NIM compression imminent given growth in lower yieldsegments and increased funding costs

Net interest margins (NIMs) for MMFS have come off given product diversification

to lower yield segments (i.e. cars, CVs etc), increase in funding costs and lower

levels of securitization.

On a like to like basis the company has withheld an 80bps cost increase to customers

and hence will likely try and claw back some of it as and when the rate cycle turns.

Recent financing done by the company at 10.2% is at a 100bps premium to

companys average cost of funds at 9.1%. Given bank base rates at 10.5-10.75%

even if rates come down average cost of funds may not come down a lot.

As regarding margin compression due to product diversification, while NIM

compression is likely to continue, overall impact on ROAs should be offset by lower

operating and provisioning costs for newer segments. Correspondingly, on a ROAlevel, we do not forecast any meaningful compression on this account.

Figure 29: MMFS - Net Interest Margin (%)


Figure 30: MMFS - ROA trends (%)


Financial profile- Share of financing of banks has gone up

over last 3 years but expect this to reverse hereon

Looking at the funding mix over last 3 years, contribution of bank funding has

increased to 54% from 40% in FY09; while funding via NCDs has been coming

down and has almost halved to 18% over the last 3 years (vs. 40% in FY09). Going

ahead, we expect this to reverse. NCD share to total funding mix should rise to 25%

and funding via securitization should be 15-20% (once regulatory clarity emerges).

Share of CP in incremental financing has gone up over the last 6 months as bank base

rates at 10.5-10.75% are at a premium to CP market (9.5-10%) and correspondingly

the company has increased its reliance on them.

10.8%

11.9%

12.7%

12.0%

10.6%

10.4%

9.0%

10.0%

11.0%

12.0%

13.0%


2.5%

2.9%

4.1%4.1%

3.2%

3.0%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%


7/31/2019 MMFS

25/36

25



Table 14: Liability profile

Sep-11 FY11 FY10 FY09

Banks 54% 57% 44% 40%CPs 10% 0% 2% 3%NCDs 18% 19% 27% 40%FDs 8% 7% 6% 1%Securitization 10% 17% 21% 22%

Source: Company

7/31/2019 MMFS

26/36

26



Business and management brief

Mahindra & Mahindra Financial services (MMFS) is a leading non banking finance

companies catering to rural and semi urban markets. MMFS is primarily engaged in

providing financing for new and pre-owned auto, utility vehicles, tractors, cars and

commercial vehicles. The company through its subsidiaries also provides housing

finance, personal loans, insurance broking and mutual fund distribution.

Mahindra & Mahindra Financial services (MMFS) is a part of Mahindra group,

which is one of the largest conglomerates in India. The group has a strong presence

in the utility vehicles, tractors, information technology, financial services, aerospace,

real estate, and hospitality and logistics sectors.

Incorporated in 1993, the company began operations as a subsidiary of M&M to

finance parent M&M's products primarily UVs and tractors. In 2002-03, companystarted financing non M&M vehicles and in FY07 entered into an agreement with

Maruti to finance its cars in semi urban and rural areas.

Figure 31: M&M financials - Group structure

Source: Company

7/31/2019 MMFS

27/36

27



Figure 32: M&M financial services Shareholding Pattern

Source: Company

Figure 33: MMFS - Product portfolio

Source: Company

Credit rating overview

MMFS enjoys good credit ratings (AA+) from key rating agencies given strong

parentage and comfortable capital position. This enables it to access capital even

when liquidity is very tight and generally not available to other NBFCs. In its recentrating outlook the agency commented-

The ratings continue to reflect Mahindra Finances majority ownership by, and

strategic importance to, its parent, Mahindra & Mahindra Ltd. The ratings are also

underpinned by Mahindra Finances strong position in utility vehicle (UV) and

tractor financing business in rural and semi-urban areas, comfortable capital

position, and stable resource profile. These rating strengths are partially offset by

Mahindra Finances modest asset quality.

Promoter57%

FI I34%

DI I5%

Others4%

7/31/2019 MMFS

28/36

28



Table 15: M&M financial Services- Credit rating

Crisil Rating OutlookFixed Deposit Program FAAA StableShort tem Debt A1+ StableLong term and subordinated debt AA+ Stable

Brickwork Rating OutlookLong term and subordinated debt AA+ Positive

Fitch Rating OutlookLong term and subordinated debt AA+ (ind) Stable

Source: Crisil,, Fitch, Brickwork

Key subsidiaries

Mahindra Rural Housing Finance Ltd

Started in Arp-07, MRHFL is a majority owned subsidiary of MMFS to provide rural

housing finance. MMFS plans to leverage on its existing strong foot print in rural

markets to provide housing loans to untapped semi urban and rural sector. Mahindra

Finance holds 87.5% in the subsidiary; while the remaining 12.5% is held by NHB.

Currently operating in 8 states, the business is in expansion stage. Overall the

company is targeting a Rs50B AUM over the next 5 years. As of Sep-11, company

has an outstanding loan book of Rs4.2B.

Table 16: MRHFL Key operating and financial details

Rs M 1HFY12 1HFY11

Loans Disbursed 1,215 829No. of Customer Contracts (Nos) 12,525 7044Outstanding loan book 4,183 2110Total income 367 192PBT 50 49PAT 38 36


Mahindra Insurance Brokers Ltd

Started in May-04, MIBL is a wholly owned subsidiary of MMFS to provide

insurance broking in life and non-life segments with a focus on rural/semi urban

markets. During FY11, MIBL crossed the 5,00,000 mark in terms of policies

serviced, with a total of 5,08,878 polices for both Life and Non- Life retail business

lines.

Table 17: Mahindra Insurance - Key operating and financial details

1HFY12 1HFY11

Total income 162 234

Net premium 1,819 1,333PBT 39 146PAT 26 94No. of Policies for the Period (nos.) 307,656 205,715No. of employees (nos.) 408 368


7/31/2019 MMFS

29/36

29



Financial Analysis

AUM growth of 45%/ 30% expected over FY12/13E

We are working with an AUM growth target of 45% and 30% respectively over

FY12/13E. This compares with 45% growth the company has been running at in 1H

and FY09-11 growth rate of 31%. The moderation in growth in FY13 is on account

of higher base and a expected slowdown in tractor/UV sales. This however is much

better than industry growth estimates (10-15%), as we expect the new business

segments to more than make up for any moderation in tractors and UVs

Figure 34: MMFS - AUM growth trends

Source: Company reports and J.P. Morgan estimates.AUM growth trends

Estimate NIM moderation

NIMs for MMFS have been moderating on account of two reasons:

1. Mix change and peaking out of asset yields in different segments as a

result of which the company has not been able to fully pass on cost

increases to customers (80bps impact). Also new businesses (i.e. cars) have

lower yields than the traditional tractor business.

2. Pressures on funding costs- Persistent rate hikes have led to increase in

borrowing costs for the company. Average borrowing cost for the company

at 9.1% is up by 120bps over last 6 quarters. Further incremental borrowing

costs at 10.2% (NCD, Bank base rates at 10.15-10.75%) are again higher by

110bps vs. last Q average. While we are forecasting a rate decrease, given

the differential between incremental and average, average cost may not

come down soon.

4%

22%

42% 45%

30%

0%

10%

20%

30%

40%

50%

0

50,000

100,000

150,000

200,000

250,000

300,000


AUM AUM growth (%)

7/31/2019 MMFS

30/36

30



Figure 35: MMFS - NIM trends

Source: Company reports and J.P. Morgan estimates.NIM chart

Scope for operating leverage flow through remains but we dont model it.

MMFS runs a lean shop but given rapid growth in the branches, lower operatingcosts for newer segments and increase in loan ticket sizes there is scope for operating

leverage to come through. Cost to AUM for the company has remained in the 3.5-4%

range over the last three years. Going ahead we do not model any change in this and

conservatively work at the top end of the historical range (3.9%).

Figure 36: MMFS - Operating costs


Asset quality is at cyclical low levels currently. Expect some normalization

GNPAs for MMFS have over time come down from almost ~9% levels to 4%

currently. As 2H is normally better than 1H, we think there is scope for improvement

over the next two Qs. Also, mix change in favor of new segments favors better asset

quality. Correspondingly given offsetting factors at play we model in stable GNPA at

4% levels. In case the new regulations come in as proposed this would rise to 5.5%.

ROA moderation given NIM compression. Capital raise may be required in

FY13E

Given moderation in NIM and some increase in provisioning costs, we expect ROA

(AUM Basis) to come down from 4% levels to 3-3.2% range. This, we estimate,

should in turn drive ROE of 19-20% over FY12-13E. Leverage for the company does

rise and this then might require a capital raise next year to maintain growth rates. To

come back to 17% levels (historical), the company in our view may require Rs8B of

additional capital or a ~13% dilution (assuming a Rs 600/share price).

10.8%

11.9%

12.7%

12.0%

10.6%

10.4%

9.0%

10.0%

11.0%

12.0%

13.0%


3.4%3.5%

4.0% 3.9%

3.9%

3.2%

3.3%

3.4%3.5%

3.6%

3.7%

3.8%

3.9%

4.0%


Cost to AUM

7/31/2019 MMFS

31/36

31



Figure 37: MMFS - RoA trends


Figure 38: MMFS - RoE trends (%)

Source: Company and J.P. Morgan estimates

Table 18: MMFS - Forecast Assumptions

% FY10 FY11 FY12E FY13E

AUM growth 22% 42% 45% 30%Off book as % of AUM 12% 10% 8% 10%

Interest income 17.1% 17.0% 17.1% 17.1%Interest expense 6.0% 5.8% 7.1% 7.5%NIM 11.2% 11.2% 10.0% 9.6%Income from securitization 1.5% 0.8% 0.6% 0.8%NIM 12.7% 12.0% 10.6% 10.4%

IEA/ Total Assets 1.0 1.0 1.0 1.0Total income 12.7% 12.0% 10.6% 10.4%CostEmployees -1.5% -1.3% -1.3% -1.3%Opex -2.2% -2.9% -2.7% -2.7%Depreciation -0.1% -0.1% -0.1% -0.1%Total -3.9% -4.4% -4.1% -4.0%Cost to income (as % of NIM) 30.5% 36.5% 39.2% 39.0%

PPOP 8.8% 7.6% 6.4% 6.3%Provisions & write offs -2.6% -1.4% -1.5% -1.7%

PBT 6.2% 6.2% 4.9% 4.6%Tax -2.1% -2.1% -1.7% -1.6%

ROA (AUM) 4.1% 4.1% 3.2% 3.0%ROA (Assets) 4.1% 4.1% 3.2% 3.0%Leverage 5.3 5.4 6.2 6.4ROE 21.4% 22.0% 20.0% 19.3%


2.5%

2.9%

4.1% 4.1%

3.2%

3.0%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%


15.4%

21.4%

22.0%

20.0%

19.3%

14.0%

16.0%

18.0%

20.0%

22.0%


ROE (%)

7/31/2019 MMFS

32/36

32



Table 19: MMFS - Income Statement

Rs MM FY10 FY11 FY12E FY13E

Interest income 14,434 19,220 28,407 38,496Interest expense 5,017 6,602 11,788 16,854NII 9,417 12,618 16,619 21,642Income from securitization 1,254 906 947 1,770Total income 10,671 13,524 17,566 23,412

Y/Y 22% 27% 30% 33%

CostEmployees (1,281) (1,515) (2,197) (2,856)Opex (1,871) (3,259) (4,503) (6,073)Depreciation (99) (158) (182) (200)Total (3,250) (4,932) (6,881) (9,129)Cost to income -30.5% -36.5% -39.2% -39.0%PPOP 7,420 8,592 10,685 14,283Provisions (2,215) (1,567) (2,549) (3,932)

PBT 5,205 7,024 8,136 10,351

Tax (1,779) (2,393) (2,766) (3,519)Tax Rate 34% 34% 34% 34%PAT 3,426 4,631 5,370 6,831

Shares 96 102 102 116EPS 35.7 45.2 52.4 59.0Y/Y 59% 27% 16% 13%


Table 20: MMFS - Balance Sheet

Rs MM FY10 FY11 FY12E FY13E

Net Fixed Assets 476 818 736 636Investments 2,159 6,746 6,746 6,746Loans and Advances 87,945 124,650 185,051 240,566

Cash 2,420 2,976 7,364 5,709Other Assets 2,150 2,352 2,379 2,411Total Assets 95,150 137,541 202,276 256,068

Current Liabilities 5,999 7,802 8,000 8,500Provisions 7,288 8,088 8,638 9,857

Debt 64,578 96,750 156,750 195,750

Share Capital 960 1,025 1,025 1,158Reserves 16,326 23,876 27,864 40,804Shareholder equity 17,286 24,901 28,888 41,962Total liabilities 95,150 137,541 202,276 256,068


7/31/2019 MMFS

33/36

33



Mahindra & Mahindra Financial Services: Summary of financials

Income Statement Growth Rates

Rs in millions, year endMar

FY10 FY11 FY12E FY13EFY10 FY11 FY12E FY13E

Interest income 14,434 19,220 28,407 38,496 Loans 22% 42% 48% 30%Interest expense 5,017 6,602 11,788 16,854 AUM 22% 42% 45% 30%NIM (%) 12.7% 12.0% 10.6% 10.4% Assets 21% 45% 47% 27%

Equity 18% 44% 16% 45%Employees (1,281) (1,515) (2,197) (2,856) RWA 22% 41% 42% 27%Opex (1,871) (3,259) (4,503) (6,073) Net Interest Income 22% 27% 30% 33%Depreciation (99) (158) (182) (200) Revenues 13% 33% 48% 36%Total Cost (3,250) (4,932) (6,881) (9,129) Costs -2% 32% 79% 43%

Pre-Provision Profits 22% 16% 24% 34%Pre-Prov. Profits 7,420 8,592 10,685 14,283 Provisions -22% -29% 63% 54%Provisions (2,215) (1,567) (2,549) (3,932) Pre-Tax 60% 35% 16% 27%PBT 5,205 7,024 8,136 10,351 Attributable Income 60% 35% 16% 27%

Tax (1,779) (2,393) (2,766) (3,519) Balance Sheet Gearing FY10 FY11 FY12E FY13E

PAT 3,426 4,631 5,370 6,831 Investment/assets 2% 5% 3% 3%

Per Share Data Rs FY10 FY11 FY12E FY13E Loan/Assets 68% 70% 77% 76%

EPS 35.7 45.2 52.4 59.0 AUM/ Assets 105% 101% 99% 102%

DPS 7.6 10.2 11.5 13.0 Equity / AUM 19% 19% 16% 16%

Payout 21% 22% 22% 22% Asset Quality/Capital FY10 FY11 FY12E FY13E

Book value 180 243 282 362 Loan loss reserves/loans 9.5% 6.8% 4.5% 4.2%PPOP per share 77 84 104 123 NPLs/loans 0.8% 0.5% 0.7% 0.9%

Loan loss reserves/NPLs

8.2 4.7 2.9 2.7

Key Balance sheet Rs inmillions

FY10 FY11 FY12E FY13EGrowth in NPLs -57% -10% 88% 75%

Net Fixed Assets 476 818 736 636 Tier 1 Ratio 16.1% 17.0% 14.2% 16.9%

Investments 2,159 6,746 6,746 6,746 Total CAR 18.5% 20.3% 16.5% 20.2%

Loans and Advances 87,945 124,650 185,051 240,566 Du-Pont Analysis FY10 FY11 FY12E FY13E

Cash 2,420 2,976 7,364 5,709 NIM (as % of Avg. Assets) 12.7% 12.0% 10.6% 10.4%Other Assets 2,150 2,352 2,379 2,411 Cost/Income 30.5% 36.5% 39.2% 39.0%

Total Assets 95,150 137,541 202,276 256,068 Cost/Assets 3.9% 4.4% 4.1% 4.0%Pre-Provision ROA 8.8% 7.6% 6.4% 6.3%

Current Liabilities 5,999 7,802 8,000 8,500 LLP/Advances 2.6% 1.4% 1.5% 1.7%Provisions 7,288 8,088 8,638 9,857 Loan/Assets 67.9% 70.3% 77.5% 76.4%Debt 64,578 96,750 156,750 195,750 Pre-Tax ROA 6.2% 6.2% 4.9% 4.6%Shareholder Equity 17,286 24,901 28,888 41,962 Tax rate 34.2% 34.1% 34.0% 34.0%

ROA 4.1% 4.1% 3.2% 3.0%Equity/Assets 19.0% 18.6% 16.2% 15.7%

ROE 21.4% 22.0% 20.0% 19.3%

Source: Company, J.P. Morgan estimates.

7/31/2019 MMFS

34/36

34



Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple researchanalysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document

individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the viewsexpressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part ofany of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or viewsexpressed by the research analyst(s) in this report.

Important Disclosures

Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of Mahindra& Mahindra Financial Services.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Mahindra & MahindraFinancial Services.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgancovered companies by visiting https://mm.jpmorgan.com/disclosures/company , calling 1-800-477-0406, or emailing

[email protected] with your request.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entireperiod.J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform theaverage total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months,we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverageuniverse.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocksin the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, eachstocks expected total return is compared to the expected total return of a benchmark country market index, not to those analystscoverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can

be found on J.P. Morgans research website, www.morganmarkets.com.

Coverage Universe: Kumar, Saurabh S: Ascendas India Trust (AINT.SI), DLF Limited (DLF.BO), Housing Development andInfrastructure Ltd. (HDIL) (HDIL.BO), Indiabulls Real Estate (INRL.BO), Indian Hotels (IHTL.BO), Ishaan Real Estate Plc (ISH.L),Jaypee Infratech (JYPE.BO), LIC Housing Finance (LICHF.BO), Oberoi Realty (OEBO.BO), Prestige Estate Projects Limited(PREG.BO), Shriram Transport Finance (SRTR.BO), Unitech Ltd (UNTE.BO)

0

219

438

657

876

1,095

1,314

Price(Rs)

Jan

09

Apr

09

Jul

09

Oct

09

Jan

10

Apr

10

Jul

10

Oct

10

Jan

11

Apr

11

Jul

11

Oct

11

Jan

12

Mahindra & Mahindra Financial Services (MMFS.NS) Price Chart

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
https://mm.jpmorgan.com/disclosures/companyhttps://mm.jpmorgan.com/disclosures/companymailto:[email protected]://mm.jpmorgan.com/disclosures/companymailto:[email protected]

7/31/2019 MMFS

35/36

35



J.P. Morgan Equity Research Ratings Distribution, as of January 6, 2012

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 47% 42% 12%

IB clients* 52% 45% 36%

JPMS Equity Research Coverage 45% 47% 8%

IB clients* 72% 62% 58%

*Percentage of investment banking clients in each rating category.

For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a holdrating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for coveredcompanies, please see the most recent company-specific research report athttp://www.morganmarkets.com , contact the primary analystor your J.P. Morgan representative, or [email protected] .

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation basedupon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues,

which include revenues from, among other business units, Institutional Equities and Investment Banking.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-USaffiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS,and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, publicappearances, and trading securities held by a research analyst account.

Other Disclosures

J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketingname for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

Options related research: If the information contained herein regards options related research, such information is available only to persons who havereceived the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options,

please contact your J.P. Morgan Representative or visit the OCC's website athttp://www.optionsclearing.com/publications/risks/riskstoc.pdf

Legal Entities Disclosures

U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in theUK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and

regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ.South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. MorganSecurities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in

Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. MorganAustralia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a

participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India PrivateLimited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National StockExchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI

Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities(Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and ExchangeCommission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK.

Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and ExchangeCommission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P.Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer

by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan SecuritiesSingapore Private Limited (JPMSS) [MICA (P) 032/01/2012 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange SecuritiesTrading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB

Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd(18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the SecuritiesCommission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities

and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom ofSaudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai:

JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is DubaiInternational Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific DisclosuresU.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL.

Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of
http://www.morganmarkets.com/http://www.morganmarkets.com/http://www.morganmarkets.com/mailto:[email protected]:[email protected]:[email protected]://www.optionsclearing.com/publications/risks/riskstoc.pdfhttp://www.optionsclearing.com/publications/risks/riskstoc.pdfhttp://www.morganmarkets.com/mailto:[email protected]://www.optionsclearing.com/publications/risks/riskstoc.pdf

7/31/2019 MMFS

36/36



publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. Thisreport has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000

(Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons

who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will beengaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in

their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue ordistribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior writtenconsent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of

the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan ChaseBank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as ofthe previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered withthe Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end datafrom two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bearcontracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk.

Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to theexchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee andconsumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan

Securities Japa

mmfs

Documents