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Mahindra Finance – Investment Snapshot(as on February 21, 2012)Recommendation :- BUYAccumulation Range :- 680 – 750Investment Period :- 18 to 24 monthsCurrent Market Price – Rs. 754.25Bloomberg / Reuters Code – MMFS IN/MMFS.BOBSE / NSE Code – 532720 / M&MFINMMFSL is a subsidiary of M&M with 57% promoterownership and it is a leading NBFC offering a range offinancial services in rural and semi-urban areas.It has been in operation since 1993, initially financingM&M dealers for tractor purchases and then into retailtractor financing. In 2002 it started financing non-M&Mvehicles as well. The company has come a long way sincethen with 48% of its loan book now attributed to non-M&M vehicles.Mkt Cap (INR BN / USD Mn) – 75.36 / 1522[1 USD – Rs. 49.50]Total Equity Shares [Mn]– 99.92Face Value – Rs. 552 Week High / Low – Rs. 840 / Rs. 590Promoter’s Holding – 57.35 %Institutional Holding – 38.84 %MMFSL has grown its AUM by more than 12X in the last10 years and also increased its distribution networkrapidly during this phase. Now, it has a good scale ofoperations along with consistent growth.MMFSL has strong lending practices and a goodunderstanding about the needs of its consumers whichhelps the company to out beat competition.Interest rate easing which is expected from RBI over thisyear will provide short term impetus to growth and alsoreduce the strain on NPA front.“ Specialists in discovering Multibagger stocks “
Key Investment HighlightsNiche Financing Company – With Indian GDP expected to grow over 8% consistently for the next severalyears, credit expansion in the country would be in the range of around 20%. While the urban markets havedecent financial penetration through various channels like private Banks, PSU Banks, NBFC’s & HFC’s, Ruralmarket is still largely underpenetrated and dominated by unorganized sources. It is in this niche area whereMMFSL has the highest presence amongst all NBFC’s.Proxy Play on Rural Prosperity – Indian rural markets are seeing a huge shift in the availability of cheap Agrilabor. This has led to increasing usage of machines and it is only expected to accelerate going forward.Another significant change has been the diversifying revenue sources for the rural population and now only45% rely on monsoon dependent Agriculture. This has led to increasing prosperity amongst Rural populationwith a huge untapped demand for Financial services.Strong Competitive Advantage – MMFSL has tremendous competitive advantages over its peers due to itsparentage which gives it a large volume of captive business. M&M is by far the largest automobile player inparentage which gives it a large volume of captive business. M&M is by far the largest automobile player inthe Rural and Semi-Urban segment with dominant market shares across Tractors, Agri Machinery, SUV’s andhas also entered CV segment recently. M&M is outpacing industry growth by a healthy margin.Healthy Lending Book – MMFSL has grown its Loan Book rapidly and its present AUM is around 20,000 Cr.Though the growth has been rapid, company has maintained strong lending practices which can be seenfrom the strong control in its NPA’s. Company has a strong team which understands the markets well, whichis very important while operating in unbanked areas where there is no credit history of the borrowers.Improving Financials – MMFSL has not only grown its lending book well, it has also improved its quality ofgrowth in the past few years with a strong decrease in Operating costs/ Assets, Productivity improvements,Introducing new products and also diversifying liabilities. It has also improved its RoA which is a veryimportant indicator to access shareholder returns from Financial companies.“ Specialists in discovering Multibagger stocks “
Industry Opportunity & Potential- An Overview- An Overview“ Specialists in discovering Multibagger stocks “
Strong Structural Demand for Financing in Rural India• India’s rural economy has been steadily growing over the past 7 years with rising incomes (up 50% from595040 3710Taiwan Hongkong South Korea Malaysia IndiaLending Business (Retail loan as % of GDP)• India’s rural economy has been steadily growing over the past 7 years with rising incomes (up 50% from2005 ) as a result of MNREGA, Bharat Nirman, improved MSP’s and several other social sector initiativesfrom the government• Indian rural GDP’s composition has changed significantly over the past few years with the increasingcontribution from Non-agricultural activities (Traders/ Shopkeepers/ Small Industries). More importantly, thedependence on monsoon for agriculture has also come down with improving irrigation facilities.• Indian financial services market is underpenetrated and rural markets have a large section of people whohave no access to organized finance. With Indian GDP growth expected to average around 8% and increasingpenetration, Indian Rural Finance market can be expected to grow over 25% for the next few years.“ Specialists in discovering Multibagger stocks “
Auto Market Growth• Rural cars & UV finance market is significantly under penetrated. Rural India accounts for 41% of car & UVmarket, but its share in financial disbursements is a meager 25%. CRISIL estimates this proportion to rise upto 33% by FY-14.Car & UV’s Financial Penetration Car & UV Distribution by Region• Indian auto sector as a whole is expected to grow at a healthy 12-18% CAGR for the next 4 years. Withincreasing demand from rural/ sub-urban regions, their % is expected to increase.• With the expansion of nimble NBFC’s providing credit for acquiring cars & UV’s, financial penetration forthese purchases will increase and help tap the pent-up demand in these regions.• With the demand for agriculture machineries like tillers, tractors etc increasing due to labor shortages inagriculture, the demand for finance will increase. With the increase in the number of salaried people inRural geographies, there is a strong demand for organized capital sources to replace the unorganized moneylenders who charge very high interest rates.“ Specialists in discovering Multibagger stocks “
Financing Cycle & Growth Drivers• The increasing market share of NBFC’s in rural retail finance is due to innovative products designed to suitthe needs of rural market, better understanding of the consumer needs, collection efficiency and focus. Thistrend is only expected to improve going forward.• Working in rural markets requires companies to handle cash with people who don’t have any credit trackrecord and hence banks haven’t been able to fully satisfy their credit financial needs.Market Share in Rural Retail Finance 2007 2008 2009 2010 2011 2012 (E) 2013 (E)Banks (Excluding Housing Finance) 74 69 68 62 58 55 53NBFC 26 31 32 38 42 45 47• Most of the tractors and UV’s are bought and rented or leased to receive income in order to pay back theirdues. Hence, there are lots of repeat customers and a strong working relationship with these small operatorsis an advantage for the existing NBFC’s with superior knowledge base.• Rural auto finance is a highly specialized business where the finance cycle is usually less than 3 years andhas fixed rates. Also NPA’s are very bad during the bad phases as during 2008-09 where gross NPA’s had shotup over 9% across the system causing considerable damage.• Hence strong focus is needed to have a Asset- Liability match along with strong customer knowledge andefficient collection practices to make money in this field. Companies also require strong balance sheet toprice these risks at an attractive rate for the customer.“ Specialists in discovering Multibagger stocks “
Mahindra Finance – Business Overview“ Specialists in discovering Multibagger stocks “
Key HighlightsWith its parent M&M growing rapidlyand expanding into new categories andGeographies, MMFSL will easilypiggyback on it for its expansion. Alsothe Mahindra name is a strong trustedbrand amongst its target clientele.Strong ParentageWith 600 branches and 20,000 CrAUM in Rural & Semi-Urbanareas, MMFSL has the largestdistribution network. Its low costmodel helps it scale faster and beRobust DistributionNetworkMMFSL has a strong managementteam led by Mr. Ramesh Iyer whichhas demonstrated excellent trackrecord.MMFSL also has strong ambitions toExecution Track RecordMMFSL model helps it scale faster and benimble when compared to banks.MMFSL has grown its loan book at arate of more than 35% CAGR for thepast few years.MMFSL also has several cross sellingopportunities which will boost itsgrowth in the coming years.Healthy Growth RateIts profitable growth is because ofits solid foundation of propersystems, processes, technology andexcellent team.MMFSL is one of the most efficientNBFC in capital utilization andreturns generated.Operational ExcellenceMMFSL also has strong ambitions togrow bigger which also includesapplying for a banking license.MMFSL“ Specialists in discovering Multibagger stocks “
Product Portfolio – Customized for Rural IndiaCaptive M&MOpportunitiesTrade FinanceTie-upsUV FinanceCar & vehiclefinancingTractor FinancePre-ownedVehicle financing• In the captive space, MMFSL obviously has ahigher market share of around 24% and itconstitutes around 47% of its total disbursements.• The captive segments are growing at a CAGR ofaround 22% due to strength of M&M’s products.• In the car finance, MMFSL has tie-ups withMaruti, Volkswagen, Hyundai etc to providefinance in rural markets.“ Specialists in discovering Multibagger stocks “New GrowthVerticals( Cross SellingOpportunity )Insurance BrokingVehicle financingRural Housing FinancePersonal LoansMutual Funddistribution / SMECredit• MMFSL has a 7% market share in this spacewhich is growing at a healthy 20% CAGR.• MMFSL has identified several new growth areasthrough which can leverage its existing network,knowledge and workforce.• All these areas have significant growth potentialand these products are custom designed for ruralpeople like loans with payment schedulesseasoned based on monsoon and crop sale.
Strong Distribution NetworkContinuous Distribution Network Growthgiving MMFSL a Pan- India Presence• MMFSL has the largest distribution network among all NBFC’s in the rural and sub-urban areas. Companyhas planned an average expansion of increasing its branches by 10% YoY.• With majority of the branches being over 10 years old, MMFSL has built a strong brand and customermindshare amongst the local population along with better understanding of social pressures that can beapplied in case of NPA’s.• Productivity and Cost/ Income ratio of branches have been increasing continuously which is leading tobetter ROE for the company. This is being reflected in MMFSL having the highest return ratios amongst itspeers in finance industry, both banks and other NBFC’s.“ Specialists in discovering Multibagger stocks “
Lending Mix – Growth from New Avenues• MMFSL has slowly started to diversify its asset base with increasing contribution from non-M&M segment.• There is humongous growth potential in areas like Housing Finance where the management expects thebook to grow over 5 Bn in the next 4 years. MMFSL always has a culture of building a strong base beforescaling up the business as seen in their Cars and other businesses.• Also its third-party distribution business of various financial products have seen considerable traction andsince its an asset light business, it can tremendously increase the ROE and profit margins.• MMFSL wide range of products not only helps it to attract customers but also to manage the risks andrewards through products which vary a lot in their yield on advances and NPL proportion.“ Specialists in discovering Multibagger stocks “
Established Track Record“ Specialists in discovering Multibagger stocks “• MMFSL has a established track record which can be seen from the PAT growth of over 40% YoY on the backof strong disbursements and improved margins. MMFSL had a low securitization portfolio and thus was notmuch affected during changes in regulations by RBI. It had a cost impact of less than 25 bps.
Operational Parameters“ Specialists in discovering Multibagger stocks “• MMFSL has a reasonably steady leverage ratio and it would require equity infusion only if it expands itsbalance sheet aggressively over the next few years. Otherwise its adequately capitalized.• A Company which has a Net NPA of 1.1% in the cyclical business is very much commendable consideringthe fuel price increase, commodity inflation resulting in higher auto prices and a dull environment.
Conservative Accounting“ Specialists in discovering Multibagger stocks “• Mahindra Finance’s NPA provisioning norms are even more stringent than RBI norms. MMFSL’sconservation provisioning coverage helps it to report stable numbers.• NBFC’s were facing severe regulatory overhang in the last year with RBI,1.) Removing NBFC lending from priority sector list of banks. MMFSL impact – 15bps.2.) Convergence of provisioning norms with banks with 90 day recovery schedule – Muted impact.3.) Improvement in the requirement of Tier-1 capital – No Impact.• Since only 13% of MMFSL’s book consists of off-balance sheet items, it will be the least impacted companyand hence can be expected to gain market share going forward. Though there has been a cost impact over30bps, MMFSL has been able to mitigate that through improved efficiencies.
Investment Rationale“ Specialists in discovering Multibagger stocks “
Competitive StrengthsMahindra & MahindraParentageCaptive Field ForceAccess to cost-effective Funding &Asset Liability MatchMMFSL has very high credit rating and with a fortress balance sheet, it hasaccess to low cost funding which intern improves its competitiveadvantages in the market.Synergy with Mahindra Group & Brand recall. Preference of MMFSL inM&M dealerships. Sale of the recovered asset through the parent’sdistribution network.Field force is entrusted with the responsibility of loan origination, creditappraisal, collection of payments and most importantly maintainingcustomer relationships. MMFSL large team and strong training is valuable.“ Specialists in discovering Multibagger stocks “ExperienceManagement TeamStrong customer anddealer relationshipsthrough 600 branchesEfficient Recoverymechanisms –Technology ledMahindra Finance has a experienced Financial Management team alongwith strong knowledge about the Auto/ CV industry prospects.MMFSL’s huge distribution network and past legacy helps in retaining oldcustomers and acquire new customers at a low cost compared to peers.A strong technology backbone which enables branches to connect withthe head offices along with GPRS led SMS system enables better customerexperience and better cash handling efficiency.
Industry Scenario• In spite of cheaper sources of funding, Banks are not able to garner higher market share because of theirlow flexibility and hence companies like MMFSL have carved a niche for themselves in their area of business.“ Specialists in discovering Multibagger stocks “
Strong Funding Sources• MMFSL has a very diversified and broad funding source. Only 50% of its requirements are from banks andthe remaining comes from liquid Mutual funds, Insurance companies etc.• Management of MMFSL have shown their interest to get a banking license, once RBI finalizes theguidelines. Considering its rural branch reach and RBI’s Financial inclusion plan, MMFSL has a strong chanceof getting a banking license which will improve its cost of funds.• MMFSL has over 80% of its liabilities under fixed rate and nearly 100% of its assets under fixed rate.Hence, it has been able to maintain its ALM match and generate consistent returns during various cycles.• MMFSL assigns part of its loan receivables to third parties to improve its capital adequacy ratio (CAR) andalso increase the efficiency of the portfolio.“ Specialists in discovering Multibagger stocks “
Competitive Scenario• Shriram Transport finance has created a strong niche in second hand UV finance market and this hasrewarded its shareholders really well. But its over dependence on the cyclical industry has led to a flat AUMin this year.• MMFSL has also created a niche for itself in the rural distribution segment and going forward wants toemerge as a one-stop financial service provider for its clients.“ Specialists in discovering Multibagger stocks “
Strong FinancialsParameters Nine Months endedDecember -11Nine Months ended December -10Spread AnalysisTotal Income/ Average Assets 16.9 % 17.4 %Interest/ Average Assets 6.7 % 5.7 %Gross Spread 10.2 % 11.7 %Overheads/ Average Assets 3.8 % 4.3 %Write Offs & NPA Provisions/ Average Assets 1.3 % 1.8 %Net Spread 5.1 % 5.6 %Ratio Analysis“ Specialists in discovering Multibagger stocks “PBT/ Total Income 29.5 % 32.5 %PBT/ Total Assets 4.4 % 4.8 %RONW (Avg. Net Worth) 19.2 % 20.9 %Overheads/ Total Assets 3.3 % 3.7 %Debt/ Equity 4.69 : 1 4.44 :1Capital Adequacy 17.5 % 17.4 %Tier 1 capital 14.6 % 13.9 %Tier 2 capital 2.9 % 3.5 %Book Value (Rs.) 280.9 211.5
Projected Growth“ Specialists in discovering Multibagger stocks “• MMFSL margins are expected to be intact andpossibly improve only the interest rates startsdecreasing this year.• Decreasing rates not only improves the cost offunds but also decreases the pressure on NPA’s.• With stable fuel prices and decreasing auto prices,disbursements are expected to grow healthily forthe next 2-3 years.
Financials“ Specialists in discovering Multibagger stocks “
Earnings ProjectionIncome Statement (INR Mn) FY 10 FY 11 FY 12E FY 13EInterest Income 15,308 19,739 26,800 34,400Interest Charges 5,017 6,602 9,850 13,050NII 10,290 13,137 16,950 21,350Net Revenues 10,671 13,524 17,500 21,890Operating Expenses 3,250 4,932 5,980 7,180Provisioning 2,215 1,567 3,180 4,450Taxes 1,762 2,393 2,840 3,470• MMFSL had a bad phaseduring the economicdownturn of 2008 which wascombined with monsoonfailure. But the recovery hasbeen sharp and swift as inmost good companies.• Company has seen strongdisbursement growthcoupled with decreasingNPA’s which has boosted itsTaxes 1,762 2,393 2,840 3,470PAT 3,444 4,631 5,590 6,790Diluted EPS 35.4 44.5 53.8 65.2- EPS Growth 60 % 25.7 % 20.8 % 21.2%Dividend Payout Ratio 24.7 % 26.2 % 21.1 % 23.4 %ROA % 4.8 4.7 4.0 3.7ROAE % 21.6 22.0 20.5 21.3NPA’s which has boosted itsbottom line.• MMFSL is projected tooutpace industry growth forthe next several years.• MMFSL has one of thehighest RoA and Profitmargins in the Industry andnearly 3X over the bestprivate sector bank.Specialists in discovering Multibagger stocks “
Concerns & ReasoningRisks Management StrategiesBad Monsoon This is the biggest risk to the company. This will suppress the overall loan bookgrowth and also add pressure to NPA. But management’s experience acrosscycles and some good structural changes in Rural areas should help MMFSL’slong term prospects.Volatility in InterestRatesMMFSL has handled the steep interest rate rise in the last year pretty well. It alsowants to balance its assets and liabilities better going forward.Rising Competition Improving branch network and getting the First mover advantage.“ Specialists in discovering Multibagger stocks “Raising Funds atcompetitive ratesMaintaining strong credit rating and Improving asset quality.Dependence on M&M Strongly growing the non-M&M portfolio.Physical CashManagementInsurance and Effective Internal Control through technology initiatives.Employee Retention Job Rotation/ ESOP/ Recovery based performance initiatives.
Conclusion“ Specialists in discovering Multibagger stocks “
Price chart• MMFSL has not correctly sharply in the past year like most other NBFC’s which is because of its superior businessShareHolding %Dec2011June2011Mar2011Dec2010Promoters 57.35 57.40 57.44 57.49FII 33.12 34.32 34.49 34.06DII 5.72 4.48 3.55 4.35• MMFSL has not correctly sharply in the past year like most other NBFC’s which is because of its superior businessperformance. The price is still at attractive levels for patient investors.• Institutional investors have slightly increased their shareholding in this counter. The strong institutional investorpresence ensures good corporate governance practices.• We feel the stock is available at good levels for the 1st phase of buying and even if it corrects another 10-15 %,investors are advised to average down considering the strong fundamentals.• Mahindra Finance’s QIP issue at 695/- share on Feb,11 was over subscribed 4 times, showing the investorsinterest in the company. In spite of strong improvement in business performance over this year, we would be ableto buy the stock at similar levels.“ Specialists in discovering Multibagger stocks “
ConclusionFinancial companies need to be very efficient in their operations and have a fortress balance sheet to giveconsistent returns for their shareholders. The best way to analyze these variables are by looking at thecompany’s numbers during tough phases of the business cycle. In that sense, MMFSL has performed wellacross business cycles which gives us huge confidence about the company’s operations.Indian rural markets are still very much underpenetrated in Financial services. There is a huge opportunityfor Financial firms and efficient nimble NBFC’s will continue to gain market share in this growing pie. MMFSLis definitely the best rural and Tier-2 towns focused NBFC considering its inherent competitive advantages.Company can also benefit short term triggers like Fall in Interest rates, Good Monsoon, Improved auto/ CVsales etc which can be an added boost to the investor.Though the company is definitely not very cheap at ~ 2.25 times FY-13 (P) book value, we feel theThough the company is definitely not very cheap at ~ 2.25 times FY-13 (P) book value, we feel thecompany deserves premium valuation considering its strong growth, Low NPA, High ROE and ROA. MMFSLhas the potential to be rerated even higher, if the environment is conductive. With a planned branchexpansion of 10% YoY, Diversified Products and Improving Operating leverage, MMFSL will be able to clockconsistent growth in its earnings for the next several years.With a large number of companies tapping Rural markets to take advantage of the increasingprosperity, MMFSL is the best positioned company to provide financial services to this unbankedpopulation. MMFSL is also a beneficiary of the increasing strength of its parent M&M in these markets.Combining strong structural bullishness with possible cyclical triggers, we are convinced on Mahindrafinance providing investors healthy compounded returns (25% CAGR) over the long term.“ Specialists in discovering Multibagger stocks “
THANK YOU“ Specialists in discovering Multibagger stocks “