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Mahindra & Mahindra Financial Equity Research

HomeCompanyMahindra & Mahindra Financial Equity Research

Date of Research – 19 January 2016

Price – Rs. 219.90

About the Company

Mahindra & Mahindra Financial Services Limited (“Mahindra & Mahindra Financial” or the “Company”), is a Non Banking Finance Company (NBFC) and a subsidiary of Mahindra & Mahindra Limited. MMFSL was incorporated in 1991 as Maxi Motors Financial Services Limited. The Company is primarily engaged in providing finance and loans for vehicles and has expanded into personal, SME and home loans. refinancing; housing finance; SME financing; personal loans; fixed deposits; mutual fund distribution; insurance broking; loan against gold, and construction equipment loan.
Mahindra & Mahindra Financial’s operations are spread across India with approx. 650 branches wherein the Company employs over 13,000 employees. Mahindra & Mahindra Financial’s vehicle financing segment has traditionally been focused on the rural and farming sector and currently includes auto and utility vehicles, tractors, cars, commercial vehicles, two wheelers, three wheelers and construction equipment.
 
The Company also provides insurance services and its insurance broking business includes insurance solutions to retail customers, as well as corporations through its subsidiary Mahindra Insurance Brokers Ltd. (MIBL).

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016  FY 2017
Total Income from Operations 4,094.99 5,275.23 6,021.14 6,553.87  7,146.20 
Expenses 2,998.41 1,531.98 1,972.53 2,459.35   3,123.00 
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 2,998.41 3,743.25 4,048.61 4,094.52   4,023.21 
Depreciation 23.66 26.08 45.51 45.70   53.72 
Finance Costs 1,670.59 2,280.96 2,643.00 2,868.35   3,186.17 
Other income 17.97 25.33 39.76 43.65   54.45 
Exceptional items (30.52) –  – 
PBT 1,352.66 1,461.53 1,399.87 1,224.12   837.76 
Tax 423.75 496.75 475.00 436.72   308.06 
PAT (before Minority Interest and share of Associates) 928.907 964.78 924.87 787.40   529.70 
Profit/ (loss) attributable to Minority Interest 1.87 10.35 11.96 15.11   18.06 
Consolidated Profit / (Loss) for the year 927.04 954.42 912.91 772.29   511.64 

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016  FY 2017
Operating Profit Margin Ratio 73.22 70.96 67.24 62.47   56.30 
Net Profit Margin Ratio 22.64 18.29 15.36 12.01   7.41 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 102.69 112.60 112.71 112.83 112.92 
Reserves & Surplus 2,928.39 4,466.95 5,180.99 5,829.89 6,356.48 
Employee Stock Option Outstanding – 
Net worth (shareholders funds) 3,031.07 4,579.56 5,293.70 5,942.72 6,469.40 
Minority Interest 7.71 23.67 36.48 49.30 67.53 
Long term borrowings 9,911.01 13,815.40 18,253.77 16,865.25 20,341.21 
Current liabilities 6,014.95 8,090.80 9,863.44 15,120.73 17,204.23
Other long term liabilities and provisions 456.07 561.36 610.11 655.16 924.48 
Total Liabilities 19,240.82 27,070.79 34,057.49 38,633.14 45,006.84 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 102.80 113.68 128.71 119.18 129.07 
Noncurrent Investments 147.26 241.68 378.96 559.67 652.21 
Current assets 9328.05 12,136.08 15,358.10 17,412.14 20,731.91 
Long term advances and other noncurrent assets 9,639.40 14,337.27 17,866.37 20,120.90 22,894.41 
Deferred Tax Assets 203.31 242.08 325.36 421.26 599.24 
Total assets 19,240.82 27,070.79 34,057.49 38,633.14 45,006.84 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 14.68 16.28 15.87 17.71 15.23 
ROE / RONW 21.22 20.24 18.03 15.36 12.17 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 4,094.99 5,275.23 6,021.14 6,553.87  7,146.20 
Growth (%) 41.95 % 28.82 % 14.14 % 8.85 %  9.04 % 
PAT (Rs. Cr.) 928.907 964.78 924.87 787.40   529.70 
Growth (%) 44.06 % 3.86 % (4.14 %) (14.86 %)  (32.73 %) 
Earnings Per Share – Basic (Rs. ) 17.43 16.95 16.19 13.69  9.06 
Earning Per Share – Diluted (Rs. ) 17.43 16.78 16.05 13.58  9.00 
Price to Earnings 12.82 2.77 16.48 17.74  36.71 

Dividend History

The Company has maintained an average dividend yield of 2.73 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Mahindra & Mahindra Financial’s average current ratio over the last 5 financial years has been 1.56 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Mahindra & Mahindra Financial’s average long term debt to equity ratio over the last 5 financial years has been 2.95 which is optimal for the company which is in the business of finance and lending.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Mahindra & Mahindra Financial’s average interest coverage ratio over the last 5 financial years has been 1.95 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Mahindra & Mahindra Financial reported a promoter holding of 51.85 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 42.14 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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