Unusual optimism saw Nomura revise upwards its target price of the automotive lender from Rs230 to Rs250
The above average annual numbers posted by Mahindra & Mahindra Financial Services (MMFS) for the March 2013 quarter prompted Nomura Equity Research to revise its target price from Rs230 to Rs250, on back of increase in earnings multiples estimates. The positive results were driven by the optimism in the utility vehicle segment and a rebound in the tractor segment. According to Nomura, the report stated: “We are bullish on retail-focused NBFCs for their relatively higher growth, stable asset quality, superior RoEs and decreasing regulatory uncertainty.” It has reiterated a ‘Buy’ call on the company due to positive asset under management, earnings growth and non-M&M lending. Furthermore, the report states, “We estimate the proportion of non-Mahindra & Mahindra disbursals to UV and tractor segment (put together) to have doubled in the 2013 fiscal compared to the previous year.”
MMFS disburses loans to different segments of the industry: utility vehicles, car, tractor, commercial vehicles, pre-owned vehicles and rural housing finance. Nomura expects the company to grow its assets under management (loans disbursed) 24% year-on-year. MMFS was able to protect its margins in FY13 despite growing its AUM at 35% y-o-y in a weak macro environment, the report said. A 24% growth forecast is optimistic considering that the automotive sector itself is going through a tough time. With interest rates heading lower, it is quite possible that disbursement will increase (at the risk of future NPAs, if interest rates go back up).
Nomura has estimated UV segment to grow 20% y-o-y for the 2014 fiscal, with strong growth forecast of M&M, XUV and Quanto models. The tractor segment is expected to grow at 15% y-o-y even though it has been performing badly last year. The car segment is expected to grow at 25% y-o-y with a market share of 11-12% in Maruti vehicles alone. It expects the CV vehicle segment to grow even more impressively by 37%, owing to small base. Surprisingly, Nomura expects pre-owned market disbursal portfolio to increase 33% y-o-y. India is a country with a poorly developed pre-owned automotive market, so this is somewhat rather optimistic expectation.
MMFS has guided 3%-4% as the fair range for GNPLs (gross non performing loans) and credit cost within 2% in a worst-case scenario, according to Nomura. The company has a decently controlled delinquency ratio. The gross non performing assets stood at 3.94%, an unusually high figure.
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