Strong Growth Prospects - M&M Financial Services
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It is quite difficult to recommend a counter when market is trading at yearly highs as it is not easy to find value buys at these levels. But whatever the market level is, we at Dalal Street Investment Journal have managed to find value buys for our investors. So, in such a scenario, we are recommending Mahindra & Mahindra Financial Services (MMFSL) to our investors. There are quite a few reasons behind recommending this NBFC which is into the business of providing personal finance for a wide range of utility vehicles, tractors and cars and focuses on the rural and semi-urban sector. The first and the foremost factor is the rural demand is expected to drive the business growth. Apart from this, other compelling factors include strong parentage of Mahindra & Mahindra, geographically diversified distribution network, improving asset quality, strong net interest margins better financial performance of its subsidiaries, improved borrowing portfolio and expected plans for banking licence.
On the valuation front also, the scrip seems to be well placed with the CMP discounting its trailing four quarter earnings by 17x. Even the price to book value stands comfortably at 3.98x. MMFSL has 487 branches in India and with 387 being in the rural areas it has deep penetration in rural India. We feel this makes it well-placed to reap the benefits of the growing prosperity in the hinterlands. Rural income is expected to remain robust going forward, owing to higher government spending on rural projects.
This factor, combined with a good monsoon in the current year and higher minimum support prices, is expected to drive auto demand post the harvesting season in 2QFY11 and the festival season in 3QFY11. Further, the company also uses the strong distribution network of more than 1,000 dealers of its parent company M&M. So the expected better rural demand along with the diversified branch network will drive its growth. On the financial front, MMFSL commands strong pricing power on the back of its niche presence in the rural market. In Q1FY11, its gross spread stood at 11.50-12 per cent. The net spread after the overheads and write offs stood at 4.40 per cent.
This has been much better than 2.70 per cent in June 2010. The management is confident of sustaining these levels next year too.As for the cost of funds, it recently changed its borrowing portfolio. It has improved significantly over the past two years, where it has reduced dependence on mutual funds as a source of borrowings, from around 50 per cent in Q3FY08 to 18 per cent in Q1FY11. As regards the asset quality, the gross NPA now stands at 1.28 per cent, which has declined from 3.10 per cent in June 2009. In addition, its subsidiaries Mahindra Insurance Brokers and Mahindra Rural Housing Finance are also performing well. Profitability of both the companies improved in Q1FY11 resulting in strong consolidated performance. On a consolidated basis, it posted a PAT of `79.90 crore as compared to `43.20 crore in Q1FY10. Further, the management is quite excited about the banking licences for NBFCs. Considering all these factors, we recommend investors to buy the scrip at current level with a target price of `800.