MAHINDRA and Mahindra Financial Services (MMFS)

 

 

Higher growth in disbursements and better asset quality may help M&M Financial Services outgrow its industry. Long term investors can buy this stock

 

MAHINDRA and Mahindra Financial Services (MMFS) is one of the leading non-banking financial companies (NBFC) in the country with a network of over 450 branches. Starting with loans for purchasing utility vehicles and tractors, the company now offers loans on heavy and used commercial vehicles with focus on rural and semi-urban markets.

   The company has recorded a robust performance in the June 2010 quarter on the back of higher growth in disbursements and better asset quality. This makes it an interesting bet for long-term investors.

BUSINESS:

MMFS is predominantly in the business of financing of utility vehicles, tractors and cars. These categories accounted for 90% of the disbursements in the June 2010 quarter. Of late, the company has ventured into other segments, such as heavy commercial vehicles (CV) and used CVs. The yield on used CV loans is higher as other financers shy away from these markets. This is because credit appraisal is extremely difficult in these markets.

   The share of newer categories in total disbursements stood at around 10% for the quarter ended June 2010. The management has indicated that the newer categories will be the growth drivers in the coming quarters. The company's presence in financing of various kinds of products helps it diversify the business risk.

FINANCIALS:

The company reported a 76% growth in disbursements in the June 2010 quarter year-on-year (y-o-y). Typically, the demand in the rural market picks up post monsoon. But this time around, the growth in disbursements was driven by an increase in demand from the auto/utility vehicles and heavy commercial vehicles segment on the back of the economic recovery.

   At the same time, the company has improved its asset quality too. Net non-performing assets formed just 1.3% of advances as against 3.1% in the same quarter last year. Investors can draw solace from the fact that the company has performed well both in the quality and the growth front.

   A high growth in disbursements has boosted the company's spreads, which jumped by 170 basis points in the June 2010 quarter compared to the year-ago period. Spreads are a measure of the difference between the cost of funds and yield on loans by the company. Spreads stood at 4.4% at the end of the June quarter.

   Moreover, the capital adequacy of the company stood at 18% at the end of the June quarter vis-à-vis 12% minimum required. This shows that the company has sufficient capital to expand without diluting its equity. Therefore, investors can expect a pro-rata growth in MMFS' profits and its earnings per share.

VALUATION:

At a price-to-book value (P/BV) of 2.1, it is trading at much lower valuations compared to its 2007 levels of 2.5. Therefore, it is cheaper compared to its
historical valuations. Moreover, the company's stock outperformed the Sensex with a return of 32% as against the benchmark's 4% in the past one month.

   This shows that investors' interest has increased recently in the company's stock. Higher growth in disbursements coupled with better asset quality will allow the company to outgrow its industry. Further, the segment it finances, primarily auto/utility vehicles and cars, tends to grow at a much higher rate than the industry in times of economic boom.

   And since the Indian economy is expected to grow its gross domestic product by 8-8.5% in the current financial year, the company can grow at a higher rate. Thus, the current valuations do not fully discount the company's growth potential. Investors can consider this stock for the long term.