MAHINDRA & MAHINDRA FINANCIAL SERVICES – Kotak Securities Research Report

Kotak Securities are very bullish on MAHINDRA & MAHINDRA FINANCIAL SERVICES and have recommended a BUY on the following investment rationale:

Buoyant rural economy, healthy monsoon to boost advances growth; revising our advances growth estimates to 25% CAGR over FY11-12.

Revising our earnings estimates following strong advances growth; NIM expected to remain stable, asset quality performance to remain healthy.

Trading at 2.9x FY11 and 2.4x FY12 P/ABVx; revising our price target to Rs.610 (Rs.520 earlier), maintain accumulate.

Buoyant rural economy, healthy monsoon to boost advances growth; revising our advances growth estimates to 25% CAGR over FY11-12.

MAHINDRA & MAHINDRA FINANCIAL SERVICES is a leading financier in the rural and semi-urban regions for automobiles.

In the wake of healthy monsoon and improved agriculture growth, business growth outlook for MAHINDRA & MAHINDRA FINANCIAL SERVICES appears highly positive. A buoyant rural economy will significantly boost advances growth. Moreover, we are of the view that MAHINDRA & MAHINDRA FINANCIAL SERVICES‘s strong geographic spread with a branch network of 487 in rural and semi-urban regions will aid in swiftly scaling up its loan book.

We are raising our advances growth estimates for MAHINDRA & MAHINDRA FINANCIAL SERVICES from 20% CAGR over FY11-12 to 25% CAGR to Rs.104.7bn and Rs.131.9bn in FY11 and FY12 respectively.

We opine that the key growth drivers for MAHINDRA & MAHINDRA FINANCIAL SERVICES continue to be the multi-utility vehicles, tractors and passengers car. While the commercial vehicle (CV) financing and pre-owned vehicle financing are expected to witness strong traction following a strong momentum in the economy activity going forward.

Revising our earnings estimates following strong advances growth; NIM expected to remain stable, asset quality performance to remain healthy.

On the back of strong growth in advances over FY11-12, we have tweaked our earnings estimates. However, given the rising interest rate scenario, we opine that MAHINDRA & MAHINDRA FINANCIAL SERVICES‘s NIM is likely to remain stable. Hence, we continue to maintain our NIM estimates for FY11-12 at around 10% (based on average AUM). We expect a net profit growth of 14% yoy to Rs.3.9bn for FY11 and 33% yoy for FY12 to Rs.5.2bn.

On the asset quality front, government schemes like NREGA have bestowed rural population with higher cash, which has improved their purchasing power. With a healthy monsoon, we opine that asset quality is likely to improve with receding slippages.