CMP 246.80

Target Price 320.00

ISIN: INE774D01024

APRIL 5th

2014

MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD

Result Update: Q3 FY14

BUYBUYBUYBUY

Index Details

Stock Data

Sector Finance (NBFC)

BSE Code 532720

Face Value 2.00

52wk. High / Low (Rs.) 355.90/196.70

Volume (2wk. Avg. Q.) 144000

Market Cap (Rs. in mn.) 139007.14

Annual Estimated Results (A*: Actual / E*: Estimated)

YEARS FY13A FY14E FY15E

Net Sales 40949.88 52899.11 66123.88

EBITDA 30163.85 36225.58 44865.05

Net Profit 9270.35 8186.49 9643.86

EPS 16.47 14.53 17.12

P/E 14.99 16.98 14.41

Shareholding Pattern (%)

1 Year Comparative Graph

MMFSL BSE SENSEX

Highlights

Mahindra & Mahindra Financial Services Ltd

(MMFSL), part of the Rs. 557 billion Mahindra

Group, is one of India’s leading non-banking finance

companies with a pan India presence.

The company’s net sales increased by 28.49% in Q3

FY14 and stood at Rs. 13585.80 million from Rs.

10573.27 million over the corresponding quarter

last year.

Consolidated Profit after Tax stood at Rs. 1823.60

million in current quarter compared to Rs. 2162.06

million in Q3 FY13.

Operating profit stood at Rs. 9003.83 million

compared to Rs. 7739.23 million in the same period

previous year.

CRISIL has assigned AA+/Stable, India Ratings has

assigned AA+(ind)/Stable and Brickwork has

assigned AA+/ Positive rating to the Company’s long

term and subordinated debt.

Gross Non Performing Assets ratio stood at 4.8% in

Q3 FY14 against 4.1% in same period previous year.

Net Non Performing Assets ratio rose to 2.2% from

1.6% in the corresponding quarter of the previous

year.

Coverage ratio stands at 55.50% in Q3 FY14.

Net Sales and PAT of the company are expected to

grow at a CAGR of 32% and 15% over 2012 to

2015E respectively.

The company has 710 offices covering 25 states and

4 union territories in India, with over 2.9 million

vehicle finance customer contracts as on December

31, 2013.

PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

Mahindra & Mahindra Financial Services Ltd. 246.80 139007.14 16.47 14.99 3.03 140.00

L&T Finance Holdings Ltd. 69.50 119432.20 1.75 39.71 3.38 7.50

Power Finance Corporation Ltd. 187.95 248101.70 40.15 4.68 1.03 70.00

Muthoot Finance Ltd. 164.35 61091.00 22.04 7.46 1.64 40.00

Analysis & Recommendation- BUY

Mahindra & Mahindra Financial Services Ltd reported 28% jump in its Consolidated Net Income YOY in the

current December quarter. Net Income stood at Rs. 13585.80 million compared to Rs. 10573.27 million in Q3

FY13. Though Profit After Tax fell by 15% YOY at Rs. 1823.60 million, EBDITA rose by 16.34% at Rs. 9003.83

million against Rs. 7739.23 million in the corresponding quarter of the previous year. Loan provisions and

write offs have increased by 120% at Rs. 1796.23 million compared to Rs. 815.16 million in the same period

previous year. Total expenditure on the whole has jumped by 61% YOY during the current December quarter.

Finance Costs have also increased 34% from Rs. 4343.68 million to Rs. 5891.47 million as short term and long

term borrowing have increased by 2.6 times and 1.15 times respectively as on 31st December quarter. Gross

NPAs as a percentage to Total Assets and Net NPAs to Total Assets stood at 4.8% and 2.2% rising by 70 and 60

basis points respectively in the current December quarter FY14.

Mahindra Insurance Brokers Limited and Mahindra Rural Housing Finance Limited, its two main subsidiaries

have grown by 22% and 25% respectively with respect to Net Profit YTD. MMFS Ltd has been impacted by

slowdown in domestic economy coupled with low automobiles sales. The company has sound financials and

with growth in economic activity and infrastructural development, is expected to perform well in the coming

quarters. Net Sales and PAT of the company are expected to grow at a CAGR of 32% and 15% over 2012 to

2015E respectively. Thus we recommend BUY for the scrip with target price of Rs. 320.00 for long and

medium term.

QUARTERLY HIGHLIGHTS (CONSOLIDATED)

Results updates- Q3 FY14

Mahindra & Mahindra Financial Services Limited

(Mahindra Finance), a leading provider of financial

services in the rural and semi-urban markets, has

reported its financial results for the quarter ended

31st December, 2013.

Rs. In Mn Dec-13 Dec-12 % Change

Net Sales 13585.80 10573.27 28.49%

PAT 1823.60 2162.06 -15.65%

EPS 3.24 19.21 -83.15%

EBITDA 9003.83 7739.23 16.34%

The company has achieved net sales of Rs. 13585.80 million for the 3rd quarter of the current year 2013-14 as

against Rs. 10573.27 millions in the corresponding quarter of the previous year. The company has reported an

EBITDA of Rs. 9003.83 million, an increase of 16.34% against corresponding quarter of the previous year and

Net Profit of Rs. 1823.60 million in Q3 FY14 against Rs. 2162.06 million reported in the corresponding quarter of

the previous year. The company has reported an EPS of Rs. 3.24 for the 3rd quarter as against an EPS of Rs. 19.21

in the same period previous year. The value of EPS has decreased in current quarter due to changes in face value

from Rs. 10/- to Rs. 2/- as on 31st March 2013.

Break up of Expenditure

Rs. In Million Q3 FY14 Q3 FY13 CHNG %

Loan Provision & Write Off 1827.652 826.331 121%

Other Expenditure 1564.289 1125.818 39%

Employee Benefit Exp 1236.297 928.228 33%

Dep & Amortz Exp 63.038 60.682 4%

Latest Updates

• During the quarter ended 31st December, 2013, the Company has made an additional investment of

Rs.5540.20 mn equivalent to US $ 0.90 million in Mahindra Finance USA LLC, a Joint Venture company

formed jointly with De Lage Landen Financial Services Inc. in the United States (nine months period ended

31st December, 2013, Rs.219.37 mn equivalent to US $ 3.84 million).

Standalone results

The Company has posted a net profit of Rs. 1641.467 million for the quarter ended December 31, 2013 as

compared to Rs. 2002.314 million for the quarter ended December 31, 2012. Total Income has increased from Rs.

10008.066 million for the quarter ended December 31, 2012 to Rs. 12711.278 million for the quarter ended

December 31, 2013.

COMPANY PROFILE

Mahindra & Mahindra Financial Services Limited (Mahindra Finance), part of the US $16.2 billion Mahindra

Group, is one of India’s leading non-banking finance companies with a pan India presence. Focused on the rural

and semi-urban sector, it provides finance for vehicles and tractors and has the largest network of branches

amongst NBFC's operating in these areas. The company has 710 offices covering 25 states and 4 union territories

in India, with over 2.9 million vehicle finance customer contracts as on December 31, 2013.

In 2012, Mahindra featured on the Forbes Global 2000 list, a listing of the biggest and most powerful listed

companies in the world. In 2013, the Mahindra Group received the Financial Times ‘Boldness in Business’ Award

in the ‘Emerging Markets’ category. Mahindra and Mahindra Financial Services Limited (MMFSL) commenced its

journey in the rural non-banking finance industry. And with that was born a vision to transform rural and semi-

urban India into a self-reliant, flourishing landscape. Since then, the company has come a long way, empowering

millions of ambitious individuals with personalised finance for a wide range of vehicles, home development

requirements.

• Loans

1. Home Loans

2. Personal Loans

3. Gold Loans

4. SME Loans

� Corporate Loans

� Equipment Finance

� Financial Advisory

� Insurance Solutions

� Project Finance

� Secured Business Loans

� Working Capital Loans

5. Vehicle Loans

� Tractor Loans

� Utility Vehicle Loans

� Car Loans

� Three Wheeler Loans

� Commercial Vehicle Loans

� Two Wheeler Loans

� Used Vehicle Loan

SUBSIDIARIES

• Mahindra Insurance Brokers Limited (MIBL) a subsidiary of Mahindra Finance is a licensed Composite

Broker providing Direct and Reinsurance broking services.

During the nine month ended 31st December 2013, MIBL registered income at Rs.787 mn as against Rs.

606.00 mn, registering a growth of 30% over the same period previous year. Profit after Tax (PAT) was

Rs.290.00 mn against Rs.237.00 mn, registering a growth of 22.36% over the same period previous year.

• Mahindra Rural Housing Finance Limited (MRHFL) a subsidiary of Mahindra Finance provides loans for

purchase, renovation, construction of houses to individuals in the rural areas of the country.

During the nine month ended 31st December 2013, MRHFL disbursed Rs. 3917 mn as against Rs. 2818 mn

during the same period previous year, registering a growth of 39% over the same period previous year.

MRHFL registered income at Rs. 1466 mn against Rs. 970.00 mn, a growth of 51% over the same period

previous year. Profit after Tax (PAT) was Rs145 mn as against Rs. 116 mn, registering a growth of 25% over

the same period previous year.

FINANCIAL HIGHLIGHTS (CONSOLIDATED) (A*- Actual, E* -Estimations & Rs. In Millions)

Balance sheet as at March 31st, 2012-2015E

MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD FY-12A FY-13A FY-14E FY-15E

I SOURCES OF FUNDS

A) Shareholder's Funds

a) Share Capital 1026.87 1126.04 1126.48 1126.48

b) Reserves and Surplus 29283.86 44669.52 52856.01 62499.87

Total Net worth 30310.73 45795.56 53982.49 63626.35

B) Minority interest 77.07 236.72 336.14 352.95

C) Non Current Liabilities

a) long term borrowing 99110.07 138154.04 163021.77 182584.38

b) Other Long term liabilities 780.44 2429.72 2162.45 2378.70

c) Long term Provisions 3578.76 3121.53 6274.28 7027.19

Total Non Current liabilities 103469.27 143705.29 171458.49 191990.26

D) Current Liabilities

a) Short term borrowings 14389.51 15819.13 41920.69 62881.04

b) Trade payables 3816.84 4893.40 5138.07 5549.12

c) Other Current liabilities 37409.53 53533.05 66916.31 76953.76

d) Short term Provisions 4729.44 6724.76 3833.11 4216.42

Total Current Liabilities 60345.32 80970.34 117808.19 149600.34

Total Liabilities (A + B + C + D) 194202.39 270707.91 343585.31 405569.90

II APPLICATION OF FUNDS

E) Non-Current Assets

a) Fixed Assets 1027.96 1136.78 1261.83 1413.24

b) Non Current Investments 1472.56 2416.81 3504.37 4310.38

c) Goodwill On Consolidation 0.00 0.00 0.50 0.59

d) Long Term loans and advances 96383.79 141662.05 178494.18 205268.31

e) Deferred Tax Asset 2033.11 2420.81 2614.47 2928.21

f) Other non-current assets 157.70 1710.65 1282.99 1359.97

Total Non-Current Assets 100047.16 148210.32 187158.35 215280.70

F) a) Current Investment 2893.75 2158.53 215.85 220.17

b) Trade receivables 111.21 157.38 201.45 241.74

c) Cash and Bank Balances 2559.69 3679.66 4709.96 5651.96

d) Short-terms loans & advances 87487.23 115138.37 150505.66 182984.27

e) Other current assets 75.39 226.87 794.05 1191.07

Total Current Assets 93127.27 121360.81 156426.97 190289.20

Total Assets (E+F) 194202.39 270707.91 343585.31 405569.90

Annual Profit & Loss Statement for the period of 2012 to 2015E

Value(Rs.in.mn) FY12A FY13A FY14E FY15E

Description 12m 12m 12m 12m

Net Sales 28849.01 40949.88 52899.11 66123.88

Other Income 254.61 179.74 206.64 231.43

Total Income 29103.62 41129.62 53105.74 66355.31

Expenditure -7888.81 -10965.77 -16880.16 -21490.26

Operating Profit 21214.81 30163.85 36225.58 44865.05

Interest -11398.98 -16705.91 -23382.37 -29929.43

Gross profit 9815.83 13457.94 12843.21 14935.62

Depreciation -202.85 -236.59 -258.04 -283.84

Profit Before Tax 9612.98 13526.58 12585.18 14651.78

Tax -3167.77 -4237.51 -4303.86 -4908.35

Profit After Tax 6445.21 9289.07 8281.32 9743.43

Minority Interest -10.24 -18.72 -94.83 -99.57

Net Profit 6434.97 9270.35 8186.49 9643.86

Equity capital 1026.88 1126.04 1126.48 1126.48

Reserves 29283.86 44669.52 52856.01 62499.87

Face value 10.00 2.00 2.00 2.00

EPS 62.67 16.47 14.53 17.12 Note: Each Equity share of the face value of Rs.10/- fully paid up was sub-divided into five Equity shares of Rs.2/- each fully paid up in Feb, 2013.

Quarterly Profit & Loss Statement for the period of 30th June, 2013 to 31st March, 2014E

Value(Rs.in.mn) 30-Jun-13 30-Sep-13 31-Dec-13 31-Mar-14E

Description 3m 3m 3m 3m

Net sales 11646.80 12857.99 13585.80 14808.52

Other income 59.76 48.79 46.27 51.82

Total Income 11706.56 12906.78 13632.06 14860.34

Expenditure -3587.12 -3777.99 -4628.24 -4886.81

Operating profit 8119.44 9128.79 9003.83 9973.53

Interest -4947.57 -5477.46 -6140.92 -6816.42

Gross profit 3171.87 3651.33 2862.91 3157.11

Depreciation -66.25 -62.56 -63.04 -66.19

Profit Before Tax 3105.62 3588.77 2799.87 3090.92

Tax -1060.02 -1235.65 -951.09 -1057.09

Profit After Tax 2045.60 2353.12 1848.78 2033.82

Minority Interest -15.07 -28.15 -25.18 -26.43

Net Profit 2030.53 2324.97 1823.60 2007.39

Equity capital 1126.04 1126.34 1126.48 1126.48

Face value 2.00 2.00 2.00 2.00

EPS 3.61 4.13 3.24 3.56

Ratio Analysis

Particulars FY12A FY13A FY14E FY15E

EPS (Rs.) 62.67 16.47 14.53 17.12

EBITDA Margin (%) 73.54% 73.66% 68.48% 67.85%

PBT Margin (%) 33.32% 33.03% 23.79% 22.16%

PAT Margin (%) 22.34% 22.68% 15.65% 14.74%

P/E Ratio (x) 17.44 14.99 16.98 14.41

ROE (%) 21.26% 20.28% 15.34% 15.31%

ROCE (%) 14.89% 15.22% 14.59% 15.28%

Debt Equity Ratio 3.74 3.36 3.63 3.64

EV/EBITDA (x) 10.52 9.59 9.14 8.17

Book Value (Rs.) 295.17 81.34 95.84 112.97

P/BV 3.70 3.03 2.58 2.18

Charts

OUTLOOK AND CONCLUSION

� At the current market price of Rs. 246.80, the stock P/E ratio is at 16.98 x FY14E and 14.41 x FY15E

respectively.

� Earning per share (EPS) of the company for the earnings for FY14E and FY15E is seen at Rs.14.53 and

Rs.17.12 respectively.

� Net Sales and PAT of the company are expected to grow at a CAGR of 32% and 15% over 2012 to 2015E

respectively.

� On the basis of EV/EBITDA, the stock trades at 9.36 x for FY14E and 7.77 x for FY15E.

� Price to Book Value of the stock is expected to be at 2.58 x and 2.18 x respectively for FY14E and FY15E.

� We recommend ‘BUY’ in this particular scrip with a target price of Rs.320.00 for Medium to Long term

investment.

INDUSTRY OVERVIEW

The Indian financial services sector is one of the most complex, yet one of the most robust service segments of

the Indian economy. Spanning from insurance to capital markets, banking to foreign direct investments (FDI)

and from mutual funds to private equity (PE) investments, the financial services sector covers all related

segments under its umbrella. Having major effects in its abstract as well as physical form post liberalisation, the

financial services segment is undoubtedly the mainstay of Indian economy.

Today it is at par with the international financial frameworks and promises to surpass them in terms of

performance in the years to come. This is very much evident from the fact that Indian financial services industry

was amongst the least affected during the crisis the world faced in 2010-11.

Insurance Sector

Indian life insurance sector collected new business premiums worth Rs 117427.00 million (US$ 1.96 billion) for

April-May 2013, according to data from the Insurance Regulatory and Development Authority (IRDA). Life

insurers collected Rs 1070107.00 million (US$ 17.84 billion) worth of new premiums for the financial year ended

March 31, 2013. Meanwhile, the general insurance industry grew by 19.6 per cent in April-May period of FY14,

wherein the non-life insurers collected premium worth Rs 13,552.46 crore (US$ 2.26 billion).

Mutual Funds Industry in India

India’s asset management companies (AMCs) have witnessed growth for the fifth consecutive quarter wherein

their average assets under management (AUM) during April-June 2013 increased by 3.68 per cent. The AUM’s

value touched a new high of Rs 8.47 lakh crore (US$ 141.17 billion), according to the latest statistics available

from industry body Association of Mutual Funds in India (AMFI).

Private Equity, Mergers & Acquisitions in India

Private equity (PE) firms upped their investments in India Inc by a hefty 42 per cent to US$ 5.4 billion through

197 deals during the first half of 2013; major deal being the US$ 1.2 billion-Bharti Airtel deal, according to a

report by EY India (formerly Ernst & Young).

Meanwhile, Merger and acquisition (M&A) activity in India was also quite intense in April-June 2013 period. The

deal tally stood at US$ 10.9 billion across 130 transactions, according to global deal tracking firm Mergermarket.

Foreign Institutional Investors (FIIs) in India

Foreign investors have immense faith in Indian financial markets. The fact is substantiated through statistics

which show that they pumped massive US$ 10 billion in Indian markets in January-March 2013 quarter.

Moreover, FII ownership in top 500 companies is highest at 21.2 per cent for the reported quarter. It increased

by 1.28 per cent in the January-March quarter alone and 2.87 per cent in 2012-13.

The number of registered FIIs in India stood at 1,757 in FY 2012-13 while the number of FII sub-accounts rose to

6,335, from 6,322 at the end of 2011-12.

Financial Services in India: Recent Developments

Tata Communications’ 100 per cent subsidiary Tata Communications Payment Solutions (TCPS) has launched

India’s first white label ATM (WLA) at Chandrapada, a tier-V town near Mumbai. The WLA has been branded

'Indicash' by the company. TCPS already operates about 27, 000 ATMs for 37 banks in India.

Meanwhile, US-based Customers Bancorp Inc (CUBI) has plans to infuse US$ 51 million in multiple securities of

Religare Enterprises Ltd. Religare is currently aspiring for a banking licence to enter the banking industry.

The investments will take place through a combination of primary and secondary market transactions.

Financial Services: Government Initiatives

• The Finance Ministry has constituted a standing council of experts to assess the international

competitiveness of the Indian financial sector. The council, to be headed by the Secretary, Department of

Economic Affairs, will analyze various monetary and non-monetary transaction costs (of doing business

in the Indian market), and make recommendations for improving its competitiveness.

• The council will also examine related policies and operating frameworks and the performance of various

segments of the Indian capital market. It will also study and suggest possibilities for reform measures

aimed at improving transparency, promoting development and strengthening governance in the Indian

capital markets, while ensuring that risks are limited and investor interests are sustained.

• Also, the RBI has, for the time being, relaxed the norm that stipulates non-banking finance companies

(NBFCs) to have a minimum gap of six months between two non-convertible debentures (NCDs) issues.

The move is aimed at streamlining the process of moving into a more robust asset-liability management

framework in a non-disruptive manner.

Road Ahead

Foreign investments fuel Indian financial markets in a big way. Experts believe that India has fared really well

over the past few years and the similar macroeconomic trends would continue in 2013. This would result in

steady FII equity flows that would enhance stock valuations, strengthen investment cycle, and sustain

consumption growth (especially at low-income levels). Moreover, portfolio fund flows are anticipated to be

higher in 2013 than those in 2012, on the back of Government reforms like passing bills that would escalate

foreign investment limits in insurance, having a uniform goods and services tax, and reconciling subsidies.

Moreover, with the Parliament passing the much awaited Banking Laws Amendment Bill recently, the face of the

Indian banking industry is set to get a lift in the coming years as the passage of the bill has paved the way for

more banks. This will not only create a healthy competition among the players in the industry, but will also

escalate the style of operation and technology.

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale

of any financial instrument or as an official confirmation of any transaction. The information contained herein is

from publicly available data or other sources believed to be reliable but do not represent that it is accurate or

complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. This document is provide for assistance only and is not intended to be and must

not alone be taken as the basis for an investment decision.

Firstcall India Equity Research: Email – info@firstcallindia.com

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