Mahindra Finance: Accelera/ng Growth MOORE SCHOOL OF BUSINESS
BRETT BURNS, ASHLING GRIFFIN, ELLIE GARDNER, ROSS HOGAN
1
Mee/ng Objec/ves I. Analyze Mahindra’s current posi8on in a
changing environment II. Determine alterna8ves available for growth III. Recommend an inclusive strategy for markets,
new opportuni8es, and new technologies
IV. Detail how we recommend implemen8ng our strategy
How can Mahindra become one of the top 50 globally admired brands by 2021?
Cri/cal Success Factors
3
Key Performance Indicators
Reach 500,000 new customers
Raise margins > 15.5%
Decrease NPA & Write Offs
Presence in new markets
Top 50 globally admired brand
Analysis
5
SWOT
Strengths • Knowledge of Indian Market
• Diversified Business Units
Weaknesses • Rela8vely unknown Interna8onally
• Limited Urban penetra8on
Opportuni8es • Government Ini8a8ves
• Economic Factors in India
Threats • Large urban based Banks
• Micro-‐Finance
6
Our Customer Rural/Semi-‐
urban Low Income Farmers
Single-‐income family
Low technology access
Word of Mouth
Customiza8on
Flexible lending cycles
India
1.2 billion popula8on with 1.88 trillion GDP
IMF: 7% growth through 2024
Median age: 27 High increases in
disposable income
69% rural popula8on
Growing role for technology
India’s Banking Sector
USD $1,089 B
Credit Extended
USD $1,479B
Total Deposits
INR 69.6B (USD $1.05B)
Gov’t Capital Infusion
New Government Ini/a/ves Smart Ci8es, AMRUT, Housing for All • Urban renewal in 500 ci8es
• 6 Mil Homes/Yr for 7 Years
Financial Inclusion
• Payment banks • Finance Banks
Increased Compe88on
Housing Boom
Greater Rural Development • Income • Technology
Rural Market Rural Urban
Customer RelaLonship Face to Face Less Personal
CompeLLon Low High
Loan Product Customized Standardized
Repayment Cyclical Steady
UnderwriLng Village Authori8es Formal models
11
Lending Perspec/ve
Repayment
Collateral Re-‐Possession
Secondary Sale
12
Mahindra’s customer
rela8onships in the rural community are essen8al and they do not want to get into stages beyond repayment
Industry Forces
Exis8ng Compe88on
New Entrants
Buyer Power
Subs8tu8ons
Supplier Power
Banking Compe/tors State • 69.9B INR capital influx from Government • State Bank of India • partnership with Paypal to service micro, small & medium sized businesses (MSMEs)
Private • Yes Bank • $220M investment from U.S. partnership (OPIC) to focus on MSMEs
• HDFC • 90% of new branches in semi-‐urban and rural areas
Mahindra vs. Tradi/onal Banks
15
Rural Presence
Profit Margins
Mahindra (NBFC)
Public & Private Sector Banks
Compe//ve Scenario Market Cap
Revenue ROA ROE Gross Non-‐Performing Assets
Sundaram Finance
168,127 23,690 2.4% 17.6% 1.45%
Shiram City Union Finance
129,514 35,320 3.2% 15.8% 3.1%
Mahindra Finance
144,410 60,609 2.5% 15.5% 5.9%
Average ROA for all Indian Banks: 0.8%
Change in RBI NPA Classifica8on
Mahindra Finance
14,200 employees genera8ng 60B revenue and 9.1B NI
INR 368.8B assets under management
CAGR 26%
Vehicles, insurance, home finance, SMEs, fixed deposits, mutual funds
Recent Financial Performance: Mahindra Finance
29%
18.00% 14% 15.10%
Revenue Growth Net Profit Margin
2014 2015
Financial Performance: Mahindra Finance
Gross Non-‐performing Assets, 5.90%
Performing Assets, 94.10%
Asset Por[olio Key Measures
Posi8ve Net Interest Margin
ROA: 3% (vs. 0.5% for urban banks)
Net Credit Write-‐off: 2.4%
Performance by Division
Revenue Net Income Customers served
Net Margin
Mahindra Home Finance
3.2 billion 442 million
82,000 13.8%
Mahindra Insurance Brokers
1.26 billion 429 million
1.1 million cases
34%
Mahindra Finance Structure Mahindra Finance
Insurance
Income: 1.26B INR
Home Finance
Income: 3.2B INR
Small & Medium Enterprise (SME)
60 Branches, more Urban
Focus
21
Growth Targets
Insurance
Increase village presence from
140,000 to 240,000 (71%) in 4 years
Home Finance
Grow to $1B disbursements from $150M to (>500%) by
2016
SME
Achieve 40B INR by 2015
22
Alterna/ves
23
Alterna/ves
Conserva8ve Expansion
Remain in rural markets
Con8nue with current
opera8ons
Avoid expansionary
policies
Middle-‐Road Strategy
Increased presence in rural
markets
Selected interna8onal expansion
Capitalize on gov’t ini8a8ves
Aggressive Expansion
Urban markets
Heavy Interna8onal Expansion
Maintain presence in rural
Decision Matrix ConservaLve Strategic Aggressive
Market expansion
Brand
Credit Quality
Customer Rela8onships
Profitability
Decision Matrix ConservaLve Strategic Aggressive
Market expansion
Brand
Credit Quality
Customer Rela8onships
Profitability
Implementa/on Plan
27
Our Plan
Take Advantage of New Markets
Created by Reforms
• Banking Expansion • Technology Expansion
• Construc8on Equipment
• Home Insurance
Strategic Interna8onal Expansion
• Acquisi8ons • Pre-‐determined Criteria for Expansion
Amer-‐Market Recycling Business
• Capture Addi8onal Revenues
• Add value through sustainability
Technology Expansion Mobile Banking: Tech Mahindra • Expect Internet Explosion • Move quickly to keep up with technology changes • Compe88on: Vodafone, Airtel, Paypal • Customer Appeal
Tap N Pay • Add to ATM loca8ons
App Crea8on • View all accounts with Mahindra • Pay/view balances, request service, connect with local representa8ves
Banking Expansion
Payment Bank • Standalone ATM’s
Infrastructure • Build on Ci8es with Renewal Projects • Expand to Pre-‐Exis8ng Loca8ons where Feasible
Rural Housing Housing for All • 42 million homes over 7 years
Home financing opportuni8es • Already have high market penetra8on
Introduce Homeowner’s Insurance as a loan add-‐on • Copy vehicle model
31
Urban Capitaliza/on
Smart City
More livable urban landscapes
in 100 ci8es
Atal Mission for Rejuvena8on and
Urban Transforma8on AMRUT
Urban renewal projects
Housing for All
20 million Houses
32
Construc8on will be essen8al • Increased demand for equipment • Higher sales in commercial vehicles • Extend financing opportuni8es beyond Mahindra vehicles
AUermarket Sales
• Not just for newly produced tractors & light commercial vehicles
Vehicles & Financing
• Can’t purchase new equipment every few years • Replacement parts are a quick and more inexpensive fix
Rural farmers and small companies have limited cash flow
Margins on replacement parts much higher
Extend financing on used vehicles & amermarket parts
33
Criteria for Interna/onal Expansion Low Household Debt/GDP Ra8o • Avoid countries with large debt burden
Large Unpenetrated Rural/SemiUrban Market
Economic Growth Poten8al
Regulatory Flexibility
Countries to Consider: Africa: Nigeria, South Africa
Indonesia
Not Recommended: China
Singapore
Singapore & China
Singapore
• Late stages of market life cycle
• Very urban • Banking & finance hub • S8ff compe88on
China
• Imports down 10 straight months • Machinery fared worse
• Manufacturing is overcapacity & declining
• Massive uninhabited ci8es • Restric8ve government policies on financial ins8tu8ons
Indonesia 200 million inhabitants
Very wide spread popula8on
Regained stability
Recent government ini8a8ves: • Curb corrup8on • Improve infrastructure • Increase housing • Eased rules to encourage FDI
Nigeria Africa important component for future growth
¼ of world’s popula8on by
2050
Fast growing economies and popula8ons
Nigeria:
Among fastest growing popula8ons • Economy & people
Indonesia & Nigeria
• In8mate knowledge landscape • Integrate technology and structure
Acquisi8on of local players
• Firm with banking and financing • Growth poten8al and compliments core competencies
Indonesia:
• 800 million phones in Africa • Mobile Banking NOT tradi8onal Brick & Mortar firms
Nigeria:
Social Responsibility Goal: Being among top 50 most admired global brands
Previously Stated:
• “Not a social responsibility business”
Sustainability: Steel Scrap Recycling Business with Tata • Top producer and consumer of steel in India
39
Social Responsibility Steel industry experience
One of largest steel producing na8ons
One of the most polluted na8ons • 6 of top 10 most polluted ci8es
Vehicle manufacturing • Parts & vehicles
Housing Boom & Urban Renewal • High demand for construc8on inputs
40
Growth in Capacity Invest in Technology and R&D • Recruit and hire somware development team • Recruit and hire fraud/privacy protec8on personnel
Construc8on and Insurance Expansion • Salesmen and finance professionals • Marke8ng Campaign • Physical loca8ons
Banking Loca8ons • 50 ci8es per year
41
Budget
0-‐1 2-‐3 4+
Staff 100 40 20/year
Technology 90 50 30
Acquisi8on -‐ 1500 TBD
Infrastructure 500 300 300
Key AssumpLons: Addi8onal Staff @ INR 400,000 per employee
$1.4M USD ini8al investment in mobile plasorm technology Con8nuing investment in Cash Management systems
Infrastructure for ATMs
In millions of INR
Pro Forma Financials Pro Forma Income Statement
In millions of INR
2015 2016 2017 2018Revenues from Operations 60,211 72,253 93,929 117,411 Other Income 398 6,503 8,454 10,567 Total Revenue 60,609 78,756 102,383 127,978 Employee Expenses 5,671 5,771 5,791 5,811 Finance Costs 26,430 28,901 37,572 46,965 Dep and Amortization 455 458 461 464 Provisions and Write Offs 8,491 9,688 10,988 12,273 Others 5,563 6,077 6,588 7,050 Total Expenses 46,610 50,896 61,400 72,562 Profits before Tax 13,999 27,860 40,983 55,416 Tax 4,750 9,472 13,934 18,842 Minority Interest 120 361 532 719 Net Profit 9,129 18,026 26,517 35,856
Pro Forma Financials Key Assumptions
2016 2017 2018 2019 2020Revenue growth 20.0% 30.0% 25.0% 25.0% 25.0%Employee Expenses 100M 20M 20M 20M 20MTax rate 34.0% 34.0% 34.0% 34.0% 34.0%Finance costs 40.0% 40.0% 40.0% 40.0% 40.0%Minority Interest 1.3% 1.3% 1.3% 1.3% 1.3%
Financial Considera/ons
Repayment Abili8es • Seasonality of cash flow
• Payment structure
Collec8ons • 80% cash • Cash management system
Asset/Liability Matching • Dura8on of borrowings matches dura8on of loans extended
Key Performance Indicators
Reach 500,000 new customers
Raise margins > 15.5%
Decrease NPA & Write Offs
Presence in new markets
Top 50 globally admired brand
Risks and Mi/ga/ons Risks MiLgaLons Severity/
Likelihood
Security of cash based economy
ATM design, fraud protecLon
Medium
Global economic slowdown
Avoid high risk markets
Medium
Increased compeLLon
Unique diversified CA (rates)
High
Insufficient Infrastructure
Government collaboraLon
Low
Exchange rate risk
Hedge High
47
Appendix Mee8ng Objec8ves
Cri8cal Success Factors SWOT
Our Customer
India New Government Ini8a8ves
Rural Market
Lending Perspec8ve Performance by Division
Growth Targets Mahindra vs. Tradi8onal Banks
Alterna8ves Our Plan Banking Expansion Technology Expansion Rural Housing Urban Capitaliza8on Amermarket Sales
Criteria for Interna8onal Expansion Social Responsibility Pro Forma Financials
Risks and Mi8ga8ons
48
Con/ngency Plan RISK
Rural compe88on proves to be too great
If Tata says “No” to partnership
MITIGATION
Acquire a small to midsize financial firm with a presence in urban Indian markets
Buy Back program, recycling partnership with municipali8es & leverage logis8cs branch
49
South Africa
Expand business model
Extend financing and insurance to vehicles
Implement Amermarket business
This will compliment our future growth model in Africa
50
Opportunity • Encourage prepayments • Recognized land value to reduce down payment
• Leverage insurance business Mortgage
• Achieving 40% CAGR in revenues, profits & cases handled
• Entrance into health insurance Insurance
• Leverage Mahindra suppliers and dealers SME
51