Mahindra & Mahindra Financial Services Ltd
(BSE Code: 532720) (CMP: Rs.400.30) (FV: Rs.2)
We had recommended this stock earlier at Rs.469.05 on 23 July 2018, where-after it zoomed to Rs.527.45. The stock has slipped to Rs.400.30 in line with the recent market crash and therefore, we believe that this is a good opportunity for investors to enter or average the stock based on its excellent Q1 numbers.
Company Background: Mahindra & Mahindra Financial Services Ltd (M&M Finance) is a subsidiary of Mahindra & Mahindra Ltd (M&M), India's largest tractor and utility vehicle manufacturer. M&M Finance started its journey in the rural non-banking finance industry two decades back and has steadily diversified its offerings and extended its reach over the years. Today, it is a leading non-banking finance company (NBFC) catering to customers primarily in the rural and semi-urban areas. It provides financing for auto and utility vehicles (UVs), tractors, cars, commercial vehicles (CVs) and pre-owned vehicles. It is also engaged in mutual fund distribution, fixed deposits and personal loans.
Subsidiaries: Mahindra Insurance Brokers Ltd (MIBL) distributes insurance products through tie-ups with various leading insurance companies. Mahindra Rural Housing Finance Ltd (MRHFL), another subsidiary, has assets under management (AUM) worth Rs.7168.15 crore (up 34%). In the housing finance segment, it has strengthened its operations in Maharashtra, Gujarat, Rajasthan, Tamil Nadu, Andhra Pradesh, Telangana, Chhattisgarh, Kerala, Karnataka, Madhya Pradesh, Uttar Pradesh, Uttarakhand and Bihar. Through Mahindra Asset Management Co. Pvt Ltd (MAMCPL), it offers a variety of mutual fund schemes with special focus in rural and semi-urban areas. Mahindra Finance USA LLC is a joint venture between M&M Finance and a subsidiary of the Rabobank group that offers wholesale inventory financing to dealers and retail financing in USA to purchase Mahindra group products.
Financials: With an equity capital of Rs.123.55 crore and reserves of Rs.9792.31 crore, M&M Finance’s share book value works out to Rs.163. The promoters hold 51.19% of the equity capital, Mutual Funds hold 11.95%, FPIs hold 28.10% and DIIs hold 0.41%, which leaves 8.35% stake with the investing public. Performance Review: For FY18, M&M Finance reported 19% higher income of Rs.8533.15 crore with 98% higher PAT of Rs.1051.43 crore and an EPS of Rs.17.62. During Q1FY19, it reported 34% higher PAT of Rs.269.05 crore on
28% higher income of Rs.1925.84 crore and an EPS of Rs.4.38. It paid 200% dividend for FY18 and 120% dividend for FY17.
Industry Overview: The Indian financial sector, which comprises commercial banks, NBFCs, co-operatives, pension funds, insurance companies, mutual funds and other financial entities, is undergoing rapid expansion. A fast-growing economy, rising income levels, higher financial savings, greater propensity to spend and improving life expectancy rates are some of the encouraging factors that are likely to boost growth in this sector in the coming years. Over the past few years, the RBI has taken steps such as introduction of small finance banks and specialized payment banks to broaden the scope of financial services in India. NBFCs are an integral part of the Indian financial system that complements the banking system. The expected reforms and drive towards various core sectors will provide more opportunities to NBFCs to create significant financial inclusion and employment opportunities across the country. In line with the government’s vision to achieve inclusive growth, the next key step is to include the unbanked population in the formal financial system. This will empower them and result in a significant rise in the average per capita income. The Indian rural market has emerged as a key growth engine in the country’s economy. Several measures were proposed to strengthen the rural economy in the Union Budget 2018-19 - Ministries to spend Rs.14.34 lakh crore on the livelihood in rural areas; National Livelihood scheme to get Rs.5750 crore; Housing for All by 2022 scheme; One crore houses to be built under the Pradhan Mantri Awas Yojana in rural areas, etc. M&M Finance has 1,284 offices across 27 states and 4 union territories with over 5.34 million vehicles. The government’s aim of doubling farmers’ income as well as a normal monsoon will boost the sentiment and earnings of the company.
Conclusion: During FY18, M&M Finance raised ~Rs.2111 crore via a preferential allotment and QIP. It allotted 2,50,00,000 shares on a preferential basis at Rs.422/share and 2,40,00,000 shares to QIP investors at Rs.440/share. It has AUM of more than Rs.5000 crore in the SME financing business and Rs.3980 crore in the Mutual Funds business. National Housing Bank owns 11% stake in MRHFL. Its total AUM rose 21% to Rs.58711 crore from Rs.48468 crore while overall disbursements grew 35% to Rs.10338.68 crore from Rs.7639.9 crore. Gross NPA (non-performing assets) declined from 14.5% to 9.4% while net NPA declined from 9.3% to 6.3% in Q1FY19. Currently, the stock trades at a P/E of 22.27x and looks quite attractive based on its financial parameters. Investors can accumulate the stock between Rs.415-390 with a stop loss of Rs.360 for a price target of Rs.600-625 in the next 15-18 months. The stock’s 52-week high/low is Rs.537.5/353. Its market cap stands at Rs.24729.13 crore.