mahindra finance

ARIHANT capital markets ltd 1

Initiating Coverage

ARIHANT capital markets ltd. Date: 13th Apr 2010

Investment Criteria

Special Business Knowledge – Mahindra Finance’s (MMFSL’s) technique of credit evaluation, business generation, loan sanction and collection, makes its business model niche. This model has helped it sustain high margins while containing the risks involved. Developed over the period, this technique cannot be not easily adopted by other financial institutions. This reduces the threat of direct competition although indirect competition from PSU banks, which now plan to focus on the rural segment, would remain.

Well Established Business with Growth Potential – The aim of MMFSL is to become one of the top rural finance brands and this is very much achievable given the potential opportunity presented by the improving prospects of rural economy. This would be supported by the geographically well established wide network of MMFSL and strategic plans of further expansion. The improving prospect of the auto sector is also highly beneficial with an encouraging trend of increasing rural sales.

Cushioned with High Margin Business, High Coverage and Adequate Capital – Catering to a high risk business the yields earned by MMFSL are also high. Better credit rating and efficient resource management keeps the cost of borrowings in check, thereby resulting in healthy margins. For FY10E we expect the spread and margins to be about 9%and 12% respectively. Aggressive provisioning adopted and adequate capital adequacy ratio provides a much needed comfort for the high risk it carries.

Financial Performance Expected to be Encouraging – Growing loans at a CAGR of 58% from FY02-07, the global crisis curtailed the same to 32% for FY04-09. However with signs of revival of economy we expect the loans to grow at a CAGR of 19% and the bottom line to expand by 26% over the period of FY09-FY12E. Despite pressures, margins are not expected to drop significantly as the Company has the ability to pass it on to the customers to a reasonable extent.

Asset Quality Strained But Controlled – Given the high risk nature of rural and auto lendings, the asset quality risk remains for MMFSL. Increasing over the years, the GNPA peaked in 2009 with the dual impact of global crisis and monsoon failure when it reached over 10%. The strain is expected to peak off and presently the same has reduced and stood at 8.7% in Q310. The Co has set up various check to tab the asset quality including use of IT. However with threat of stimulus pullback, we expect have built in some strain till FY12E. A consequtive monsoon failure or slower than expected revival of economy will remain to be key risk.

Valuation – Established business with good growth prospects, cushion for risks and M&M patronage make MMFSL a good investment bet. Improving prospects of rural segment and auto industry as well as Cos. plans for expansions and diversification, improves its future prospects. Concerns would be consecutive poor monsoon in FY11 and competition from increasing rural focus of PSU banks. At CMP of Rs 378 the stock is trading at 1.8x of FY11E P/BV and 9.9x P/E. Given the historical and peer comparison we value the stock at 2.1 times the book value of FY11E and arrive at a price target of Rs 437 over a period of 12 months giving a potential upside of 15%. We recommend an “ACCUMULATE” on the stock and would revisit our assumptions post the FY10 results.

CMP: Rs.380 Target Price: 437 Industry: NBFCStock InfoMarket Capital Rs.3663 crEquity Capital Rs. 96.9 crAvg Trading Vol. 72398 (Qtly)52 WK High/Low 402/198Face Value Rs. 10

BSE Group ABSE Code 532720NSE Symbol M&MFINBloomberg MMFS INReuters MMFS.BOBSE Sensex 17933NSE Nifty 5362

Shareholding Pattern (As on 31st

December, 2009) Promoters 61.3Domestic Institutions 7.9Foreign 26.9Corporate 0.6Public & Others 3.3

Rs in Cr FY09 FY10E FY11E FY12E

Net Interest Income 855 991 1161 1341

Operating profits 608 726 859 977Net Profit 215 321 369 430

NIM (% )(calculated) 12.4 13.0 12.9 12.5

Gross NPAs (%) 8.7 8.7 8.9 8.8

Net NPAs (%) 2.4 2.2 2.1 2.0

EPS 22 34 39 45RoA (%) 3.0 4.0 3.8 3.8

RoAE (%) 15.4 20.2 19.9 19.9

PE (x) 16.9 11.3 9.9 8.5

PBV (x) 2.5 2.1 1.8 1.6

Mahindra Finance Limited ACCUMULATE


Initiating Coverage

Special Business Knowledge To Service Perceived High Risk Customers

MMFSL drove into the rural and semi-urban India essentially to finance the vehicles from M&M stable (tractors and SUVs) whichwere the predominant vehicles used in this segment. This was mainly done to overcome the unavailability of finance and promote sales.Over the years it expanded in the same premise to offer a range of financial products and services. MMFSL's customer base largelyincludes small entrepreneurs or self-employed individuals such as transport operators, taxi operators and farmers.

MMFSL is set between a bank and local money lender. It operates flexibly and speedily like a money lender while offering much competitive rates. The Company follows a unique business model for generating business, sanctioning loan and its collection. The main part is the credit evaluation which considers customer’s capability, limitation, business background and cash flows.

The company does not follow a DSA model and business is generated by the employees.

Products are tailored to suit affordability and cashflow The customer facing employees are locally recruited and maintain direct

contacts with the existing and prospective customers. Variable portion of salary is connected to collection rather than

business. The loan approval process is simple, speedy and flexible considering the

low literacy and poor banking habits of the customers. On an average the loans are approved within just two days.

MIS and follow up is direct and comprehensive Not more than one loan extended to a single person The loan to value is about 70%

Over the years the company has gathered in-depth knowledge and understanding of the dynamics of the rural and semi-urban areas. It has also built strong relationship with its customers while developing close association with vehicle dealers too. Apart from this “Mahindra” brand is a known and trusted name in the rural and semi-urban India which allows the Company easy acceptance and trust. Goal of MMFSL is to become one of the top rural finance brands.

Improving Rural Prospects –

70% of India’s population resides in rural areas, accounting for 64% for the expenditure and a third of country’s savings. According to a study by the Rural Marketing Association of India (RMAI), the rural and small town economy accounts for 60% of India's income. It’s obvious that India’s next phase of growth lies in urbanisation and development of these areas. In fact, as per Mckinsey, despite rising urbanisation, 63% of population will continue to live in the rural areas even in 2025.

Demographic classification Urban Rural Total

Rich ( income greater than Rs 1 m per annum) 4.8 1.3 6.1

Well off (income greater than Rs 0.5 m per annum) 29.5 27.4 56.9

Total 34.3 28.7 63.0

% of total 54.4% 45.6%

% of households owning products (2008)

Top 20 cities Other cities Rural

Car 23 5 3

Bicycle 37 61 69

Colour TV 68 47 17

AC 5 3 0

Refrigerator 63 34 8

Computer 8 3 1Source – Mint

Source – Ministry of Communications & Information Technology, India

> flexible and speedy than Banks - lesser

documentation

> competitive than Money

lenders -Lower rates

Local employees like money

lender

Trustworthy like banks

MMFSL

Rural and Semi-Urban India Focus Set between a bank and Money lender Physical Presence in villages Documentation-free Relationship-

based Model Comprehensive Follow up and

collection

The rural opportunity –Huge population, Structural changes, shift to non food spending, increase in employment opportunities/ income, increased focus on the segment by Govt


Initiating Coverage

The rural focus is not only due to size but also due to the changing profile of villagers and growth potential in income and consumption. Improved minimum support price and alternative employment opportunity has resulted in increased share of rural contribution in the country’s GDP. It is known that the under leveraged and savings oriented rural Indian economy remained unscathed by the recent global slowdown. Infact the rural consumer market, which grew 25% in 2008 when demand in urban areas slowed, is expected to reach US$ 425 billion in 2010-11(nearly double of 2004-05 size), according to a white paper prepared by CII-Technopak. However still agriculture is an important occupation there and erratic monsoon has adversely affected the area and will continue to do so in future.

Though the some of the reasons for the growing impetus on rural India may be temporary like agriculture waiver, there are many permanent ones also like rural development thrust of Govt through focus on agriculture, agricultural credit, rural areas and rural spending. The Union Budget for 2009-10 has hiked the allocation for the rural development by 45% through its various initiatives like NREGA, Bharat Nirman etc. Even RBI is keenly pursuing financial inclusion. While Govt is trying to improve social measures like literacy, unemployment and poverty; companies are trying to tap the potent consumption demand emanating there from. Nonetheless rural infrastructure is still far behind and technology is also distant which increase the cost of transactions.

Improving Demand from Auto Segment

…..Long Term OutlookThe automobile industry in India happens to be the ninth largest in the world and has become one of the top five exporters of automobiles. It will cross the 10 million unit mark in the current year. And going by the ‘Automotive Mission Plan 2016’ of the Government, at a CAGR of 16%,the total sales is expected to be near 28.8 million units by 2016.

India is on every major global automobile player's roadmap. With growing working population, increased access to credit, better credit products, upward moving income levels, high pace of urbanisation and improving infrastructure thrust - auto industry is looking up.

Rural India vehicle density is 2.3% and improving rural prospects make it a focal agenda for the auto companies, especially the small cars, two wheeler and utility vehicles. The improving roads and infrastructure also improve the prospects of demand. The demand for farm equipment vehicle is also bound to rise with these vehicles finding alternative use in construction and other non-agricultural activities like haulage, trailer applications or excavations. The tractor penetration level in India is very low as compared to the world standards. Also the penetration levels are also not uniform throughout the country. While the northern region is now almost saturated in terms of new tractor sales, the southern region is still under penetrated. This points out to the potent growth lying to be tapped. In this background, given already high penetration in urban markets, rural India offers big opportunity to the industry. Infact it is expected that Maruti’s rural sales which contributed only 3.5% two years back would contribute 16.5% to the total sales in FY10.

UrbanRural

Income Distribution

Source – Business Today

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5,000

10,000

15,000

20,000

25,000

30,000

35,000

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY16E

Total Domestic Vehicle Sales (in '000)

Source –Automotive Mission Plan; Arihant Research

Growing working population, increased access to credit, better credit products, upward moving income levels, high pace of urbanisation and improving infrastructure thrust – positives for auto industry


Initiating Coverage

…Near Term SceneAfter slugging performance for past two years, the auto industry revived on the back of number of impetus including –

Pent up demand Improving Interest rate scenario Easy access to Finance Stimulus by Govt New Launches Lower fuel prices

The vigor of this demand has led us to believe that a hike in interest rates on vehicle loans will have little impact on sales, even though 60-70% of car purchases and 50% of two-wheeler sales are financed through credit.

However there was still a long way to go before the high sales figures of 2007 are reached. Few impending concerns are –

rising input costs, freeing oil prices monsoon failure slower than expected growth of economy slowdown and hindrances in the infrastructure development of rural and semi urban areas Stimulus pullback earlier than warranted

….Creates Credit Opportunities for MMFSL

Data suggests that there is a high demand of credit in the villages. The improved economic prospects in general and autosector in particular will create a suitable premise for companies like MMFSL. Company has created a bunch of products to serve the most common credit needs of rural Indians. It has network and niche model to serve its special customer profile. Also being an early entrant, it is better placed to tap the upcoming opportunities.

….With Limited Threat Of Competition

Improving rural prospects is drawing attention of companies as well as financial institutions like banks. However tapping this potent demand will not be easy for institutions like bank as servicing rural Indians consumers isa different ballgame given their traditional background, literacy levels and micro demands. It is not surprising that only 31% of the adult rural population has access to institutionalized credit while the rest depend money lenders. As per surveys, 26% of rural India’s chief wage earners (CWEs) are illiterate compared with 8% in urban India. 7% of rural CWEs are graduates compared with 29% in urban India.

The business model of MMFSL has been established over decades and is difficult to replicate in a short time. The business is set on relationship based model which is a key to service the targeted customer profile. The documentation formality of banks makes the process less flexible and time consuming. There are no salary slips, no profit and loss statement, no IT returns and no post dated cheques. Hence it is not easy for them to tap these customers, judge their credit worthiness and collect the dues.Also banks usually follow a DSA model where the skills and commitment cannot be assured.

Nonetheless the vast network of PSU banks, established customer profile, perceived dependability and most importantly the low interest rates offered – all of this can be difficult to mitigate. However deeper banking penetration in rural India will create a bigger market and can be a positive for the creating and tapping the potent demand.

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

FY06 FY07 FY08 FY09

Industry Domestic Growth

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200,000

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Increasing Tractor Production

Though focus is shifting towards rural India, servicing the population there needs a specialised business model with risk aversion techniques which cannot be built over a short time creating entry barriers

Source: M&M

Source: M&M


Initiating Coverage

Systematically Diversifying - Range of Offerings

MMFSL was formed mainly to overcome the unavailability of finance in rural areas and promote sales of Mahindra vehicles.Mahindra group has always been in a constant state of afflux and in same flow MMFSL also later broadened its prospects to include non-Mahindra vehicles, which now forms ~60% of its total financing, and a range of other products. This allows it to offer a bunch of financial solutions to its customers. The wide network of more than 440 branches and relationship with more than 11 lakhs customers allows it a deeper reach and potential for cross selling. With Mahindra brand being a household name in rural India due to tractors, the same trust gets extended to MMFSL.

Over the years, MMFSL has been figuring out the rural and semi-urban mindset and perceiving their demands and accordingly introducing newer products and services to its stable. Starting from M&M vehicles with one branch in Mumbai, over one and a half decade the firm has grown to multi products with more than 440 branches.

New additions planned to the bouquet includes gold loans, used vehicle financing, and medium to heavy commercial vehicle financing in construction sector. MMFSL offers loans for new vehicles to mainly small truck operators owning less than two vehicles. The used vehicle foray is at conceptual stage and would take some time to materialise as the company is developing a different model to tap this segment.

Consistent Business Growth Expected to Resume

Starting only in 1991, MMFSL has grown rapidly since early 2000’s and thereafter maintained a consistent growth. Over FY02-07 its loan assets grewat a CAGR of 58% after which due to global crisis the Company sloweddown to avoid increasing defaults. A glimpse of performance over past five years including period of slowdown can be seen in the chart below.

Over the past three years its loan assets have grown at a CAGR of 9% withthe topline and bottomline growth of CAGR 28% and 27% respectively.With general improvement in economy and in particular the vehicle industry as well as rural segment, the growth prospects are expected to improve. Apart from improving economy, we expect that the growth will be supported by the strategic increase in its network as well as product profile. Securitisation will continue at same pace or may even reduce going forward as the Co looks to expand its balance sheet. At present it has an extensive scale with approximately 443 branches covering more than 90% districts in India along with relationship with nearly 1800 dealers. We expect the loans to grow at a CAGR of 19% and the bottom line to expand by 27% over the period of FY09-FY12E.

MMFSL comes in handy for auto companies with little presence and network in India and rural and semi urban areas in particular. The company has already got into tie-ups with car makers like General Motors and Maruti to provide finance for their vehicles. The financial inclusion thrust by RBI and Govt will help in increasing the credit prospects of rural Indians and will allow MMFSL to cross sell its products more effectively. At present its non-auto business forms just 5% of its total AUM while we expect it to increase to about 10% in coming few years.

Asset Finance

Personal Loans

MF Distribution

Insurance Broking

Housing Finance

Fixed Deposits

Gold Loans

Consistent growth as since inception is expected to resume with recovery in economy. Increased network will also help. We expect the loans to grow at a CAGR of 21% and the bottom line to expand by 33% over the period of FY09-FY12E.

Auto, 35.0%

Tractors, 23.0%

Cars, 28.0%

CV, 9.0%

Others, 5.0%

Break up of AUM


Initiating Coverage

Asset Quality Under Stress But Guarded With Aggressive Provisioning

Biggest challenge in extending loans to rural section is assessing the credit worthiness given the near absence of traditional documentation proof. Therefore banks hesitate to extend loans. However this presents a viable opportunity to MMFSL. With proven credit assessment technique and comprehensive follow-up, the risk is contained. Faulty credit assessment is covered up with efficient collection practice which is personally done by the employee who generates the respective loan, for first few months. Employees being locals are regularly in touch with the borrowers building and maintaining relationship and regularly assessing the asset quality. NPA’s are also low as the products sold are customised on the basis of assessed cash flow of customer.

The provisioning and NPA recognition norms of MMFSL are very stringent when compared to the regulatory requirements of RBI. With 95% of the loans being secured, all outstanding above 24 months are fully provided even though the RBI requires a 50% provision after 54 months.Networth to net NPA cushion is improving and is expected to further improve over the period of projection in line with economic condition.

The gross NPA of MMFSL has been increasing over the years and rose to levels of more than 10% in the third quarter of FY09. The evident slowdown in the economy in general and auto industry in particular, after the global crisis led to a slowdown in advances and increase in defaults. To add to the woes was the monsoon failure and its resulting impact on the rural India. Evidently the major defaults came from the tractor segment. However Company had anticipated worse situation. But due to loan waiver, increase in Minimum Support Price, NREGA schemes, alternate use of tractors as construction equipment, resorting to liquidation of gold assets etc, the defaults were controlled.

GNPA as at end of December 2009 stood at 8.7% and the Company expects it to remain at this level for FY10. The Company has been steadily increasing its provision coverage and from 57% in FY07 it has increased to 75%. This is expected to increase further and as per our estimates if there is no further major deterioration in asset quality, the same will increase to 78% by FY12E. As per the Company historically the eventual write-off has been less than 2%.

Apart from slower economic revival, a second consecutive monsoon failure in the current year may definitely put pressure on the asset quality. This would remain to be a potential downside risk to our projections.

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Net NPA Coverage Net NPA to NW

(Rs Cr)

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12,000 AUM Estimated value of Assets financed YTD

95% secured loans Comprehensive follow-up Provisioning at a faster rate

and hence high coverage Rural economies stable

with alternative earning sources Eventual loss < 2%

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Gr. NPA %


Initiating Coverage

Diverse Sources of Funds With Competitive Cost

Majority of the resource is generated by the Company from banks and mutual fund which together form more than 80% of the total borrowings. Instrument wise bank term loans (40%) and bonds (35%) form chunk of the borrowing kit. There is no financial support of the parent group Mahindra and around 85% to 90% of the borrowings are secured in nature. The Company has no foreign currency loans.

MMFSL follows a conservative ALM policy and is mostly in sync. In the falling interest rate however it had a positive ALM as it increased its over one year borrowings a low rates to nearly 85% while only 30% of its advances were receivable within one year. Currently the gap has been reduced with nearly 75% of the borrowing repayable over one year.

Fixed deposit acceptance which was discontinued in April 2005 were re-started in January 2009. Overall, MMFSL still has substantial headroom to further raise resources.

….Cost Of Funds Controlled

The current average cost of borrowing is at around 9%. Judicious liability management along with good credit rating and securitization allows MMFSL to control its funding cost. Given the inflation and tightening in near future we have estimated the same to increase during our projection period.

Brickwork Ratings has assigned BWR AA+ – The rating takes into account MMFSL’s business model which has clear focus on untapped rural/semi-urban markets, proven track record in asset financing, wide network of field staff across 25 states, well diversified portfolio, high capital adequacy and backing of the parent company Mahindra & Mahindra Ltd. (M&M). The rating is however constrained by high NPA of the company.

CRISIL has reaffirmed its ratings at ‘AA-/FAA/Stable/P1+’ – The ratings factor in the support that Mahindra Finance receives from its parent, Mahindra & Mahindra Ltd, healthy capital position, stable and diversified resource base, and substantial unutilised bank lines giving flexibility to raise resources at competitive costs and high yields. However CRISIL believes that the overall credit losses in Mahindra Finance’s portfolio may increase as asset quality continues to be under stress.

Healthy Margins Sustainable

Yields for funding rural demands have generally been higher considering the risk factors. Average yield on advances for MMFSL comes to approx 18.5% thereby earning a decent spread of about 9.5% and hence a high net interest margin. This is much above the margins earned by the banking sector. Despite hardening of interest rates we expect the margins to remain stable though with a bit of downward bias as the Company has the ability to pass on the increase to its customers to a reasonable extent. However with increased competition from banks and other NBFC’s, the margins may face pressure going forward. With 100% fixed lending – in case the rates rise, the outstanding book will pull down yields and hence margins also.

Securitisation Benefit

Tractors financed by MMFSL classify as priority sector lending for banks. Banks seek these loans at attractive values, allowing MMFSL to encash some of the loan originations and use the funds for further lending. This helps in improving the NIM bylowering the cost of funds as well as also helps in managing ALM. The securitisation is in the nature of direct bilateral assignment and as per its internal policy, MMFSL securities not more than 20% of its new loans generated during the year and at present the total outstanding is a little over Rs 1000 cr.

Capital Cushion

The Company, being a NBFC, is required to maintain a CAR of more than 12% at any given time. By end of December 2009,its capital position was healthy with Tier-I capital adequacy ratio (CAR) at 16.8% and overall CAR at 19.4%. The debt to equity ratio is at 3.6 times. Company came out with IPO in 2006 at a premium of Rs 180/share after which the next equity dilution was in February 2008 through 11.2% preferential issue to TPG Axon Capital and Standard Chartered Private Equity(SCPE) at Rs 380/share resulting in a 13.4% dilution. TPG however moved out recently still leaving some serious long term investors like Copa Cabana, SCPE, and Tree Line Asia Master etc. The company is not likely to go for further equity dilution in near future.

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Bonds/NCD's

Securitisation

FD's

CPs

Fund Mix Instrument-wise


Initiating Coverage

Patronage of/to M&M

MMFSL finances around 31% of M&M’s utility vehicle and light commercial vehicle while about 24% of tractor sales. All this forms about 60% of its disbursements. Though this is much below the 100% financing that it started with, still a substantial amount of financing for M&M comes from MMFSL making it strategically important for the parent. On the other hand, the Company gets to leverage on the Mahindra brand.

Subsidiaries -Mahindra Insurance Brokers Ltd. (MIBL) - Insurance Broking

Incorporated in 2005, MIBL undertakes direct insurance broking business, both in the Life and Non-Life insurance segments with a focus on Retail and Commercial lines of businesses. Its turnover as well as profit has been growing at nearly 40% CAGR since its inception. However employee retention is a big problem given the fact the business requires learned employees with special qualification. PAT for 9M10 was Rs 8.6 cr forming less than 5% of the standalone profit of MMFSL.

Mahindra Rural Housing Finance Ltd. - Housing Finance Business

This subsidiary came up in 2008, to tap the potential housing demand in the rural and semi-urban areas. Owning a house provides significant economic security and dignity in society in India and being a huge investment in monetary terms, the demand for credit is also big. But the same is not met due to the strict lending covenants of banks on one side and high interest rate of money lenders on the other. Hence this segment can turn into a compelling opportunity for MMFSL. The Co.owns 87.5% in the subsidiary with the remaining 12.5% held by NHB (National Housing Board).

At present the scale is small and the net profit contribution at present is not even 0.5% of the total profits. The outstanding loan sanctioned till December 2009 stood at Rs 119 cr. Dynamics of such loans is again different for rural and semi urban areas. Housing loans in rural areas are necessarily construction loans and at times take over one year to clear due to difficulty in getting clear title of land, documentation deficiency, language barrier etc. Spread over a period of five years, the defaults are quite low. At present only 40-50 branches of the company is catering to this segment but plans are in vogue to expand the same in future to a larger extent.

Mahindra InSource – Manpower Outsourcing arm of Mahindra

Formed recently, MMFSL has transferred nearly 10% of its employees to this subsidiary. Employees are now outsourced from here and retained on professional fees. Done for clerical level employees, this saves hassles like appraisal and promotion as well as charges like PF and other contributions.

Peer ComparisonThough there is no one to one comparison, we have weighed it against related NBFC’s.

Rs in Cr Business CMP (09/04/10)

Market Cap Networth

Average Loans

Average Assets

Debt to Equity

Gross NPA%

MMFSL Predominant auto 377 3,611 1,671 7,490 8,033 3.7 8.7

Shriram City Union General Finance 456 2,095 802 4,223* 4,101 6.2* 2.43Shriram Transport Used Vehicle 550 12,347 2,889 20,109 24,782 7.3 2.4

Rs in Cr PE (x) P/BV RoA RoE PAT 9M10 PATM% (9M10)MMFSL 12 2.0 3.9 17.5 202 19Shriram City Union 12 2.5 3.6 23.6 149 19

Shriram Transport Finance 15 3.7 3.1 29.3 609 19

Stock Performance1M Return 6M Return 1 Yr Return 52 Wk High 52 Wk Low

MMFSL 2 70 56 402 197

Shriram City Union 0 15 38 550 279 Shriram Transport Finance 11 48 204 585 183

20

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18

01020304050607080

Net premium

Total Income

PBT PAT No of customers

3- Yr CAGR Insurance Business

*FY09


Initiating Coverage

IT Initiative

Co IT initiatives are encouraging. All the branches of MMFSL are connected giving real time status of business. Apart from this, the very innovative hand-held devices are used for issuing on-the-spot receipt for collection which are in turn connected on a real time basis to its nearest branch which helps in better servicing of customers as well as helps to control the related cash handling risk.

Strong ManagementA dependable and well experienced team heads the company with Chairman Mr. Bharat Doshi and Managing Director Mr Ramesh Iyer. The Co has very well represented Board of Directors which includes the likes of Mr. Pawan Goenka, Mr. M G Bhide, Mr M.B.N. Rao etc. Such a strong team assures of a fortified corporate governance also.

About Mahindra and Mahindra Finance Limited

Mahindra & Mahindra Financial Services Limited (MMFSL) is one of India’s leading deposit-taking non-banking finance companies focused on the rural and semi-urban sectors. Engaged in retail segment, it primarily finances auto loans of M&M as well as non-M&M brands (UVs, tractors, CV’s and cars) while also financing personal loans and gold loans. Company carries out mutual fund distribution, insurance broking and housing finance. MMFSL is a subsidiary of Mahindra & Mahindra Limited(60% holding), a leading tractor and UV manufacturer with more than 60 years’ experience in the Indian market. Currently, MMFSL has a network of 443 branches and about 4500 employees. The company has a presence in more than 90% of the country’s districts and has disbursed Rs 21,000 crore since its inception.

Reported Results For 9M FY10

The revival of economy and auto sector growth in 2010, helped MMFSL comeback after last two years slowdown.

Co. posted strong number for the nine months ended December 2009 due to lower base effect. The disbursement grew by ~23%, loan assets grew by 11% and AUM by 16% on a YoY basis.

Improved cost of funds helped in increase in spreads from 11% to 11.7%. Along with this lower credit cost helped in net spread improvement from 2.9% to 4.8%.

YoY Gross NPA improved from 10.1% to 8.7% and the coverage improved from 65% to 75%.

Branch network was reinstated to 442 and the net value of assets financed improved from Rs 4,843 cr to Rs 6,177 cr.

Rs in Cr 9M 10 9M 09

Interest Income 1,067 975 9%

Interest Expense 378 383 -1%

Net Interest Income 689 593 16%

Other Income 27 11 132%

Operating Income 716 604 19%

Operating Expense 225 203 11%

Employee Expense 90 87 4%

Other 134 116 16%

Operating Profit 491 402 22%

Provisions 188 237 -21%

Profit Before Tax 304 165 84%

Tax Provisions 101 59 73%

Profit after Tax 202 106 90%

EPS (Rs) 21.2 11.2

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PBV=1.2 PBV=1.7 PBV=2.2PBV=2.7 MMFSL


Initiating Coverage

Annual Standalone Financials

Income StatementYear to 31st March

(Rs. Cr) FY09 FY10E FY11E FY12E

Interest Income 1,365 1,512 1,803 2,137

Interest Expenses 510 519 643 796

Net Interest Income 855 992 1,161 1,341

- growth % 14 16 17 16

Other Income 20 30 45 62

Operating Income 875 1,022 1,205 1,403

- growth % 13 17 18 16

Operating Expenses 267 295 346 426

- Staff Cost 117 126 139 175

- Other Expenses 149 169 207 252

Gross Profits 608 727 859 977

- growth % 17 20 18 14

Provisions 282 242 300 326

Profit Before Taxes 326 486 559 651

Taxes 111 165 190 221

Profit After Taxes 215 320 369 430

- growth % 21 49 15 16

Statement of AffairsAs on 31st March (Rs. Cr) FY09 FY10E FY11E FY12E

Capital 97 97 97 97

Reserves & Surplus 1,372 1,372 1,614 1,894

Networth 1,469 1,469 1,712 1,991

Borrowings 5,213 5,213 6,187 7,489

- growth % 3 19 21Other liabilities & provisions 762 762 849 984

Total Liabilities 7,444 7,444 8,748 10,464

ASSETS

Cash 276 276 260 312

Advances 6799 6799 8035 9601

- growth % 3 18 19

Investments 110 110 157 209

Fixed assets 37 37 42 50

Other assets 222 222 255 292

Total Assets 7,444 7,444 8,748 10,464

Ratio Analysis

FY09 FY10E FY11E FY12E

Spread analysis (%)

Average Yield on Advances 18.8 18.9 19.0 19.0

Average cost of Funds 9.9 9.1 9.4 9.7

Interest Spread 8.9 9.8 9.6 9.3

Net Interest Margin 12.4 13.0 12.9 12.5

Efficiency Indicator (%)

Cost to Income 30.5 28.9 28.7 30.4

Asset per Employee ( Rs Cr) 1.6 1.8 2.2 2.4

Profit per Employee ( Rs lacs) 4.5 6.7 7.7 8.3

Return Ratios

Return on Avg. Net Worth 15.4 20.2 20.0 20.0

Return on Average Assets 3.0 4.0 3.8 3.8

Valuation ratios (x)

P/E 16.9 11.3 9.9 8.5

P/BV 2.5 2.1 1.8 1.6

Ratio Analysis

FY09 FY10E FY11E FY12E

Basic Ratio (Rs.)

EPS 22 34 39 45

Book Value per share 153 179 208 242

Dividend per share 5.5 7.0 8.0 9.0

Dividend Yield 1.4 1.8 2.1 2.4

Asset Quality (%)

Gross NPAs 8.7 8.7 8.9 8.8

Net NPAs 2.4 2.2 2.1 2.0

NPA Coverage 71.9 74.3 76.0 76.9

Business Performance (%)Operating profit margin (%) 44.6 48.1 47.7 45.7

Net profit margin (%) 15.7 21.2 20.5 20.1Net Int. Inc/Total Income 61.7 64.4 62.8 61.0

Other Income/Expense 7.4 10.1 12.9 14.7NII/ Average Total Assets 11.8 12.2 12.1 11.7Operating profit/Avg Total Assets 8.4 9.0 8.9 8.5Net Profit/Avg Total Assets 3.0 4.0 3.8 3.8

Asset Growth 6.0 17.5 19.6 18.6


Initiating Coverage

Stock Rating Scale

BUY : >20%ACCUMULATE : 12-20%HOLD : 5-12%REDUCE : <5%

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