Mahindra and Mahindra Financial Services

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Mahindra & Mahindra Financial Services Ltd (MMFSL)
- The Strongest Rural NBFC

Content Index
• Mahindra Finance – Investment Snapshot :- Slide #4
• Industry Opportunity – An Overview:- Slide #6
• Mahindra Finance – Business Overview :- Slide #10
• Investment Rationale :- Slide #18Investment Rationale :- Slide #18
• Mahindra Finance – Financials:- Slide #25
• Concerns & Reasoning :- Slide #27
• Conclusion :- Slide #30
“ Specialists in discovering Multibagger stocks “

Mahindra Finance – Investment Snapshot
(as on February 21, 2012)
Recommendation :- BUY
Accumulation Range :- 680 – 750
Investment Period :- 18 to 24 months
Current Market Price – Rs. 754.25
Bloomberg / Reuters Code – MMFS IN/
MMFS.BO
BSE / NSE Code – 532720 / M&MFIN
MMFSL is a subsidiary of M&M with 57% promoter
ownership and it is a leading NBFC offering a range of
financial services in rural and semi-urban areas.
It has been in operation since 1993, initially financing
M&M dealers for tractor purchases and then into retail
tractor financing. In 2002 it started financing non-M&M
vehicles as well. The company has come a long way since
then with 48% of its loan book now attributed to non-
M&M vehicles.
Mkt Cap (INR BN / USD Mn) – 75.36 / 1522
[1 USD – Rs. 49.50]
Total Equity Shares [Mn]– 99.92
Face Value – Rs. 5
52 Week High / Low – Rs. 840 / Rs. 590
Promoter’s Holding – 57.35 %
Institutional Holding – 38.84 %
MMFSL has grown its AUM by more than 12X in the last
10 years and also increased its distribution network
rapidly during this phase. Now, it has a good scale of
operations along with consistent growth.
MMFSL has strong lending practices and a good
understanding about the needs of its consumers which
helps the company to out beat competition.
Interest rate easing which is expected from RBI over this
year will provide short term impetus to growth and also
reduce the strain on NPA front.

Key Investment Highlights
Niche Financing Company – With Indian GDP expected to grow over 8% consistently for the next several
years, credit expansion in the country would be in the range of around 20%. While the urban markets have
decent financial penetration through various channels like private Banks, PSU Banks, NBFC’s & HFC’s, Rural
market is still largely underpenetrated and dominated by unorganized sources. It is in this niche area where
MMFSL has the highest presence amongst all NBFC’s.
Proxy Play on Rural Prosperity – Indian rural markets are seeing a huge shift in the availability of cheap Agri
labor. This has led to increasing usage of machines and it is only expected to accelerate going forward.
Another significant change has been the diversifying revenue sources for the rural population and now only
45% rely on monsoon dependent Agriculture. This has led to increasing prosperity amongst Rural population
with a huge untapped demand for Financial services.
Strong Competitive Advantage – MMFSL has tremendous competitive advantages over its peers due to its
parentage which gives it a large volume of captive business. M&M is by far the largest automobile player inparentage which gives it a large volume of captive business. M&M is by far the largest automobile player in
the Rural and Semi-Urban segment with dominant market shares across Tractors, Agri Machinery, SUV’s and
has also entered CV segment recently. M&M is outpacing industry growth by a healthy margin.
Healthy Lending Book – MMFSL has grown its Loan Book rapidly and its present AUM is around 20,000 Cr.
Though the growth has been rapid, company has maintained strong lending practices which can be seen
from the strong control in its NPA’s. Company has a strong team which understands the markets well, which
is very important while operating in unbanked areas where there is no credit history of the borrowers.
Improving Financials – MMFSL has not only grown its lending book well, it has also improved its quality of
growth in the past few years with a strong decrease in Operating costs/ Assets, Productivity improvements,
Introducing new products and also diversifying liabilities. It has also improved its RoA which is a very
important indicator to access shareholder returns from Financial companies.

Industry Opportunity & Potential
- An Overview- An Overview

Strong Structural Demand for Financing in Rural India
• India’s rural economy has been steadily growing over the past 7 years with rising incomes (up 50% from
59
50
40 37
10
Taiwan Hongkong South Korea Malaysia India
Lending Business (Retail loan as % of GDP)
• India’s rural economy has been steadily growing over the past 7 years with rising incomes (up 50% from
2005 ) as a result of MNREGA, Bharat Nirman, improved MSP’s and several other social sector initiatives
from the government
• Indian rural GDP’s composition has changed significantly over the past few years with the increasing
contribution from Non-agricultural activities (Traders/ Shopkeepers/ Small Industries). More importantly, the
dependence on monsoon for agriculture has also come down with improving irrigation facilities.
• Indian financial services market is underpenetrated and rural markets have a large section of people who
have no access to organized finance. With Indian GDP growth expected to average around 8% and increasing
penetration, Indian Rural Finance market can be expected to grow over 25% for the next few years.

Auto Market Growth
• Rural cars & UV finance market is significantly under penetrated. Rural India accounts for 41% of car & UV
market, but its share in financial disbursements is a meager 25%. CRISIL estimates this proportion to rise up
to 33% by FY-14.
Car & UV’s Financial Penetration Car & UV Distribution by Region
• Indian auto sector as a whole is expected to grow at a healthy 12-18% CAGR for the next 4 years. With
increasing demand from rural/ sub-urban regions, their % is expected to increase.
• With the expansion of nimble NBFC’s providing credit for acquiring cars & UV’s, financial penetration for
these purchases will increase and help tap the pent-up demand in these regions.
• With the demand for agriculture machineries like tillers, tractors etc increasing due to labor shortages in
agriculture, the demand for finance will increase. With the increase in the number of salaried people in
Rural geographies, there is a strong demand for organized capital sources to replace the unorganized money
lenders who charge very high interest rates.

Financing Cycle & Growth Drivers
• The increasing market share of NBFC’s in rural retail finance is due to innovative products designed to suit
the needs of rural market, better understanding of the consumer needs, collection efficiency and focus. This
trend is only expected to improve going forward.
• Working in rural markets requires companies to handle cash with people who don’t have any credit track
record and hence banks haven’t been able to fully satisfy their credit financial needs.
Market Share in Rural Retail Finance 2007 2008 2009 2010 2011 2012 (E) 2013 (E)
Banks (Excluding Housing Finance) 74 69 68 62 58 55 53
NBFC 26 31 32 38 42 45 47
• Most of the tractors and UV’s are bought and rented or leased to receive income in order to pay back their
dues. Hence, there are lots of repeat customers and a strong working relationship with these small operators
is an advantage for the existing NBFC’s with superior knowledge base.
• Rural auto finance is a highly specialized business where the finance cycle is usually less than 3 years and
has fixed rates. Also NPA’s are very bad during the bad phases as during 2008-09 where gross NPA’s had shot
up over 9% across the system causing considerable damage.
• Hence strong focus is needed to have a Asset- Liability match along with strong customer knowledge and
efficient collection practices to make money in this field. Companies also require strong balance sheet to
price these risks at an attractive rate for the customer.

Mahindra Finance – Business Overview

Key Highlights
With its parent M&M growing rapidly
and expanding into new categories and
Geographies, MMFSL will easily
piggyback on it for its expansion. Also
the Mahindra name is a strong trusted
brand amongst its target clientele.
Strong Parentage
With 600 branches and 20,000 Cr
AUM in Rural & Semi-Urban
areas, MMFSL has the largest
distribution network. Its low cost
model helps it scale faster and be
Robust Distribution
NetworkMMFSL has a strong management
team led by Mr. Ramesh Iyer which
has demonstrated excellent track
record.
MMFSL also has strong ambitions to
Execution Track Record
MMFSL model helps it scale faster and be
nimble when compared to banks.
MMFSL has grown its loan book at a
rate of more than 35% CAGR for the
past few years.
MMFSL also has several cross selling
opportunities which will boost its
growth in the coming years.
Healthy Growth Rate
Its profitable growth is because of
its solid foundation of proper
systems, processes, technology and
excellent team.
MMFSL is one of the most efficient
NBFC in capital utilization and
returns generated.
Operational Excellence
MMFSL also has strong ambitions to
grow bigger which also includes
applying for a banking license.
MMFSL

Product Portfolio – Customized for Rural India
Captive M&M
Opportunities
Trade Finance
Tie-ups
UV Finance
Car & vehicle
financing
Tractor Finance
Pre-owned
Vehicle financing
• In the captive space, MMFSL obviously has a
higher market share of around 24% and it
constitutes around 47% of its total disbursements.
• The captive segments are growing at a CAGR of
around 22% due to strength of M&M’s products.
• In the car finance, MMFSL has tie-ups with
Maruti, Volkswagen, Hyundai etc to provide
finance in rural markets.
New Growth
Verticals
( Cross Selling
Opportunity )
Insurance Broking
Vehicle financing
Rural Housing Finance
Personal Loans
Mutual Fund
distribution / SME
Credit
• MMFSL has a 7% market share in this space
which is growing at a healthy 20% CAGR.
• MMFSL has identified several new growth areas
through which can leverage its existing network,
knowledge and workforce.
• All these areas have significant growth potential
and these products are custom designed for rural
people like loans with payment schedules
seasoned based on monsoon and crop sale.

Strong Distribution Network
Continuous Distribution Network Growth
giving MMFSL a Pan- India Presence
• MMFSL has the largest distribution network among all NBFC’s in the rural and sub-urban areas. Company
has planned an average expansion of increasing its branches by 10% YoY.
• With majority of the branches being over 10 years old, MMFSL has built a strong brand and customer
mindshare amongst the local population along with better understanding of social pressures that can be
applied in case of NPA’s.
• Productivity and Cost/ Income ratio of branches have been increasing continuously which is leading to
better ROE for the company. This is being reflected in MMFSL having the highest return ratios amongst its
peers in finance industry, both banks and other NBFC’s.

Lending Mix – Growth from New Avenues
• MMFSL has slowly started to diversify its asset base with increasing contribution from non-M&M segment.
• There is humongous growth potential in areas like Housing Finance where the management expects the
book to grow over 5 Bn in the next 4 years. MMFSL always has a culture of building a strong base before
scaling up the business as seen in their Cars and other businesses.
• Also its third-party distribution business of various financial products have seen considerable traction and
since its an asset light business, it can tremendously increase the ROE and profit margins.
• MMFSL wide range of products not only helps it to attract customers but also to manage the risks and
rewards through products which vary a lot in their yield on advances and NPL proportion.

Established Track Record
• MMFSL has a established track record which can be seen from the PAT growth of over 40% YoY on the back
of strong disbursements and improved margins. MMFSL had a low securitization portfolio and thus was not
much affected during changes in regulations by RBI. It had a cost impact of less than 25 bps.

Operational Parameters
• MMFSL has a reasonably steady leverage ratio and it would require equity infusion only if it expands its
balance sheet aggressively over the next few years. Otherwise its adequately capitalized.
• A Company which has a Net NPA of 1.1% in the cyclical business is very much commendable considering
the fuel price increase, commodity inflation resulting in higher auto prices and a dull environment.

Conservative Accounting
• Mahindra Finance’s NPA provisioning norms are even more stringent than RBI norms. MMFSL’s
conservation provisioning coverage helps it to report stable numbers.
• NBFC’s were facing severe regulatory overhang in the last year with RBI,
1.) Removing NBFC lending from priority sector list of banks. MMFSL impact – 15bps.
2.) Convergence of provisioning norms with banks with 90 day recovery schedule – Muted impact.
3.) Improvement in the requirement of Tier-1 capital – No Impact.
• Since only 13% of MMFSL’s book consists of off-balance sheet items, it will be the least impacted company
and hence can be expected to gain market share going forward. Though there has been a cost impact over
30bps, MMFSL has been able to mitigate that through improved efficiencies.

Investment Rationale

Competitive Strengths
Mahindra & Mahindra
Parentage
Captive Field Force
Access to cost-
effective Funding &
Asset Liability Match
MMFSL has very high credit rating and with a fortress balance sheet, it has
access to low cost funding which intern improves its competitive
advantages in the market.
Synergy with Mahindra Group & Brand recall. Preference of MMFSL in
M&M dealerships. Sale of the recovered asset through the parent’s
distribution network.
Field force is entrusted with the responsibility of loan origination, credit
appraisal, collection of payments and most importantly maintaining
customer relationships. MMFSL large team and strong training is valuable.
Experience
Management Team
Strong customer and
dealer relationships
through 600 branches
Efficient Recovery
mechanisms –
Technology led
Mahindra Finance has a experienced Financial Management team along
with strong knowledge about the Auto/ CV industry prospects.
MMFSL’s huge distribution network and past legacy helps in retaining old
customers and acquire new customers at a low cost compared to peers.
A strong technology backbone which enables branches to connect with
the head offices along with GPRS led SMS system enables better customer
experience and better cash handling efficiency.

Industry Scenario
• In spite of cheaper sources of funding, Banks are not able to garner higher market share because of their
low flexibility and hence companies like MMFSL have carved a niche for themselves in their area of business.

Strong Funding Sources
• MMFSL has a very diversified and broad funding source. Only 50% of its requirements are from banks and
the remaining comes from liquid Mutual funds, Insurance companies etc.
• Management of MMFSL have shown their interest to get a banking license, once RBI finalizes the
guidelines. Considering its rural branch reach and RBI’s Financial inclusion plan, MMFSL has a strong chance
of getting a banking license which will improve its cost of funds.
• MMFSL has over 80% of its liabilities under fixed rate and nearly 100% of its assets under fixed rate.
Hence, it has been able to maintain its ALM match and generate consistent returns during various cycles.
• MMFSL assigns part of its loan receivables to third parties to improve its capital adequacy ratio (CAR) and
also increase the efficiency of the portfolio.

Competitive Scenario
• Shriram Transport finance has created a strong niche in second hand UV finance market and this has
rewarded its shareholders really well. But its over dependence on the cyclical industry has led to a flat AUM
in this year.
• MMFSL has also created a niche for itself in the rural distribution segment and going forward wants to
emerge as a one-stop financial service provider for its clients.

Strong Financials
Parameters Nine Months ended
December -11
Nine Months ended December -
10
Spread Analysis
Total Income/ Average Assets 16.9 % 17.4 %
Interest/ Average Assets 6.7 % 5.7 %
Gross Spread 10.2 % 11.7 %
Overheads/ Average Assets 3.8 % 4.3 %
Write Offs & NPA Provisions/ Average Assets 1.3 % 1.8 %
Net Spread 5.1 % 5.6 %
Ratio Analysis
PBT/ Total Income 29.5 % 32.5 %
PBT/ Total Assets 4.4 % 4.8 %
RONW (Avg. Net Worth) 19.2 % 20.9 %
Overheads/ Total Assets 3.3 % 3.7 %
Debt/ Equity 4.69 : 1 4.44 :1
Capital Adequacy 17.5 % 17.4 %
Tier 1 capital 14.6 % 13.9 %
Tier 2 capital 2.9 % 3.5 %
Book Value (Rs.) 280.9 211.5

Projected Growth
• MMFSL margins are expected to be intact and
possibly improve only the interest rates starts
decreasing this year.
• Decreasing rates not only improves the cost of
funds but also decreases the pressure on NPA’s.
• With stable fuel prices and decreasing auto prices,
disbursements are expected to grow healthily for
the next 2-3 years.

Financials

Earnings Projection
Income Statement (INR Mn) FY 10 FY 11 FY 12E FY 13E
Interest Income 15,308 19,739 26,800 34,400
Interest Charges 5,017 6,602 9,850 13,050
NII 10,290 13,137 16,950 21,350
Net Revenues 10,671 13,524 17,500 21,890
Operating Expenses 3,250 4,932 5,980 7,180
Provisioning 2,215 1,567 3,180 4,450
Taxes 1,762 2,393 2,840 3,470
• MMFSL had a bad phase
during the economic
downturn of 2008 which was
combined with monsoon
failure. But the recovery has
been sharp and swift as in
most good companies.
• Company has seen strong
disbursement growth
coupled with decreasing
NPA’s which has boosted itsTaxes 1,762 2,393 2,840 3,470
PAT 3,444 4,631 5,590 6,790
Diluted EPS 35.4 44.5 53.8 65.2
- EPS Growth 60 % 25.7 % 20.8 % 21.2%
Dividend Payout Ratio 24.7 % 26.2 % 21.1 % 23.4 %
ROA % 4.8 4.7 4.0 3.7
ROAE % 21.6 22.0 20.5 21.3
NPA’s which has boosted its
bottom line.
• MMFSL is projected to
outpace industry growth for
the next several years.
• MMFSL has one of the
highest RoA and Profit
margins in the Industry and
nearly 3X over the best
private sector bank.
Specialists in discovering Multibagger stocks “

Concerns & Reasoning
Risks Management Strategies
Bad Monsoon This is the biggest risk to the company. This will suppress the overall loan book
growth and also add pressure to NPA. But management’s experience across
cycles and some good structural changes in Rural areas should help MMFSL’s
long term prospects.
Volatility in Interest
Rates
MMFSL has handled the steep interest rate rise in the last year pretty well. It also
wants to balance its assets and liabilities better going forward.
Rising Competition Improving branch network and getting the First mover advantage.
Raising Funds at
competitive rates
Maintaining strong credit rating and Improving asset quality.
Dependence on M&M Strongly growing the non-M&M portfolio.
Physical Cash
Management
Insurance and Effective Internal Control through technology initiatives.
Employee Retention Job Rotation/ ESOP/ Recovery based performance initiatives.

Conclusion

Price chart
• MMFSL has not correctly sharply in the past year like most other NBFC’s which is because of its superior business
Share
Holding %
Dec
2011
June
2011
Mar
2011
Dec
2010
Promoters 57.35 57.40 57.44 57.49
FII 33.12 34.32 34.49 34.06
DII 5.72 4.48 3.55 4.35
• MMFSL has not correctly sharply in the past year like most other NBFC’s which is because of its superior business
performance. The price is still at attractive levels for patient investors.
• Institutional investors have slightly increased their shareholding in this counter. The strong institutional investor
presence ensures good corporate governance practices.
• We feel the stock is available at good levels for the 1st phase of buying and even if it corrects another 10-15 %,
investors are advised to average down considering the strong fundamentals.
• Mahindra Finance’s QIP issue at 695/- share on Feb,11 was over subscribed 4 times, showing the investors
interest in the company. In spite of strong improvement in business performance over this year, we would be able
to buy the stock at similar levels.

Conclusion
Financial companies need to be very efficient in their operations and have a fortress balance sheet to give
consistent returns for their shareholders. The best way to analyze these variables are by looking at the
company’s numbers during tough phases of the business cycle. In that sense, MMFSL has performed well
across business cycles which gives us huge confidence about the company’s operations.
Indian rural markets are still very much underpenetrated in Financial services. There is a huge opportunity
for Financial firms and efficient nimble NBFC’s will continue to gain market share in this growing pie. MMFSL
is definitely the best rural and Tier-2 towns focused NBFC considering its inherent competitive advantages.
Company can also benefit short term triggers like Fall in Interest rates, Good Monsoon, Improved auto/ CV
sales etc which can be an added boost to the investor.
Though the company is definitely not very cheap at ~ 2.25 times FY-13 (P) book value, we feel theThough the company is definitely not very cheap at ~ 2.25 times FY-13 (P) book value, we feel the
company deserves premium valuation considering its strong growth, Low NPA, High ROE and ROA. MMFSL
has the potential to be rerated even higher, if the environment is conductive. With a planned branch
expansion of 10% YoY, Diversified Products and Improving Operating leverage, MMFSL will be able to clock
consistent growth in its earnings for the next several years.
With a large number of companies tapping Rural markets to take advantage of the increasing
prosperity, MMFSL is the best positioned company to provide financial services to this unbanked
population. MMFSL is also a beneficiary of the increasing strength of its parent M&M in these markets.
Combining strong structural bullishness with possible cyclical triggers, we are convinced on Mahindra
finance providing investors healthy compounded returns (25% CAGR) over the long term.

THANK YOU

Mahindra and Mahindra Financial Services

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