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Stock Pick From The Finance Sector

| 5/3/2012 9:00 PM Thursday

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as Choice Scrip for this issue is a leading NBFC having a wide range of financing products in its portfolio.We believe that a strong management and good business growth will benefit the company in the future, which in turn, will move the scrip price northwards.

There are many reasons why we are recommending Mahindra & Mahindra Financial Services (MMFS) as the Choice Scrip for this fortnight. First, the company has a strong management and has reported robust financial numbers. Another important fact in favour of this stock is that MMFS provides financial services in rural and semi-urban areas, which are untapped and have good growth potential. In addition to this, the company has a wide range of products in its portfolio. Lastly, the reversal of interest rates will benefit the company.

MMFS, as the name suggests, is a subsidiary of Mahindra & Mahindra (M&M), which has a 56 per cent stake in the company. It is a leading non-banking finance company (NBFC) having a wide range of products in its portfolio, which include vehicle financing, pre-owned vehicle financing, insurance broking, housing finance, personal loans, etc. It has 607 offices as of 31st March, 2012, with a major presence in rural and semi-urban areas.

There is a synergy between M&M and MMFS’ businesses, which is evident from the fact that around 27 per cent of the total value of assets financed by the latter is for the automobiles and utility vehicles of M&M. Further, 19 per cent of its business comes from M&M Tractors. However, its dependence on M&M has declined from 35 per cent in FY10 to 27 per cent in FY12.

The business is well diversified, with 33 per cent (up from 29 per cent in FY10) coming from cars and SCVs (non-M&M), 11 per cent from commercial vehicles and construction equipments, and the remaining 10 per cent from pre-owned and others. Going ahead, the Society of Indian Automobile Manufacturers (SIAM) has forecasted a growth of around 10-12 per cent for the Indian Automobile Industry for FY2012-13. Financing this would further drive growth for the company.

  • MMFS is a leading NBFC having a wide range of products in its portfolio, which include vehicle financing, pre-owned vehicle financing, insurance broking, housing finance, personal loans, etc.
  • It provides financial services in rural and semi-urban areas, which are untapped and have good growth potential.
  • With the interest rates reversing, its Net NPAs will decline further and the margins will inch northwards.

BEST OF LAST ONE YEAR

Company Name

 Reco.

CMP (Rs)

Gain %

Ajanta Pharma

342.00

552.75

61.62

Havells India

386.60

557.95

44.32

HSIL

133.00

174.30

31.05

Nestle India

3746.85

4605.80

22.92

FAG Bearings India

1261.00

1511.90

19.90

Asian Paints

2985.00

3533.00

18.36

Torrent Pharma

559.00

650.05

16.29

ING Vysya Bank

325.00

371.00

14.15

CMP as on May 2, 2012


 

On the financial front, its consolidated operating income increased by 42 per cent to `2884.9 crore for FY12, while its net profits increased by 30 per cent to `644.5 crore. Its Capital Adequacy Ratio (CAR) stood at 18 per cent. Many banks and financial institutions have seen their margins and Net NPAs impacted in the past one year. MMFS was also affected, but to a limited extent. Both these parameters have been affected on a YoY basis, but have improved on a sequential basis.

SHARE HOLDING PATTERN AS ON: 31/3/2012

Indian Promoters

57.26

Mutual Funds and UTI

4.97

FIIs

33.91

Private Corporate Bodies

0.52

Others

3.34

GRAND TOTAL

100

As of 31st March, 2012, its Net NPAs have increased by 10 basis points YoY to 0.7 per cent. However, they declined on a sequential basis and stood at 1.1 per cent for the first nine months of FY12. On a YoY basis, the net spread decreased by 40 basis points to 5.9 per cent for the year ended March 2012. However, the net spread improved by 80 basis points and stood at 5.1 per cent for the nine month ended December 2011. With the interest rates reversing, we believe that the company’s Net NPAs will decline further and the net spread will inch northwards.

LAST FIVE QUARTERS (Rs /CR)

 

12-Mar

11-Dec

11-Sep

 Jun 11

11-Mar

Income From Operat.

880.27

767.34

677.29

572.23

613.44

Provisions

13.84

49.86

54.27

57.01

11.31

PBIT

702.7

556.86

466.94

374.71

458.2

Interest

339.09

319.63

262.68

218.5

197.35

Net Profit

242.39

159.32

136.33

105.47

165.53

Equity Share Capital

102.69

102.59

102.54

102.51

102.45

MMFS could be one of the companies that may apply for a banking license going ahead. It is a consistently dividend paying company, with a dividend yield of two per cent. On the valuations front, the stock is available at a PE multiple of 11.33x, while its P/BV stands at 2.39x, which is fairly valued as compared to its peer, Shriram Transport Finance, which is available at a P/BV of 2.62x. We believe that a strong management and good business growth will benefit the company in the future, which in turn, will move the scrip price northwards.

 

Find More Articles on: DSIJ Magazine, Choice Scrip, Stock Recommendations, Fundamental Picks, Product, Large Cap, Mid Cap

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