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Mahindra and Mahindra Finance – Strength in Rural India

June 24, 2013

M&M Financial - Rural StrengthMahindra and Mahindra Financial Services – MMFSL is a dominant player in rural vehicle finance market. MMFSL has clear advantage vs competition, in that, most competitors have single / fewer product (vs MMFSL’s diversified product offering) or are regionally focused (vs MMFSL’s pan India). Finally, despite slower (~6-10%) underlying volume growth across products. Expect MMFSL to show healthy AUM growth (~30%) in FY14, as it gains market share, with larger distribution in the semi-urban, rural segments and a close-to-customer model and strategic tie-up with other OEM.

Asset Quality Policies like linking a part of employees’ pay to asset quality, making sourcing person responsible for first six months’ collection and lower LTVs have helped MMFSL reduce its gross NPLs from 9.0%+ in FY09 to ~3.1% in FY13.

Earnings & Valuations MMFSL is expected to earn an EPS of Rs18.8 and Rs24.3 for FY 2014 and FY 2015 respectively. If a company like MMFSL can generate a stronger RoE compared with its cost of capital, growth becomes higher and the multiple expands. High growth that is accompanied by a high RoE is valued by the market. In emerging markets, banks that can provide higher RoEs, with sound asset quality and strong growth potential, tend to trade at significantly higher multiples, as is the case with private banks in India.

MMFSL’s strong group backing (parent Mahindra & Mahindra is one of the leading vehicle manufacturers in India, with +40% market share in tractors and +55% in UVs) and its relationships with dealership network across the country are among the key advantages for the company.

Accumulate MMFSL at around Rs220 to Rs200 Levels for a 12 Months Target of Rs280 based on the fundamentals of the company. This is in-line with our recommendation of going Long on Quality Private Banks & Finance

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