Strong recoveries drive Mahindra Finance's Q4, net profit jumps 1.8 times

Better product-mix with rising share of pre-owned vehicles helped Mahindra Finance's profitability

Mahindra and Mahindra Financial Services surprised the Street with healthy March-2019 quarter (Q4) numbers on most fronts. The stock, however, fell by about 4 per cent in Thursday’s trade (results were announced after market hours on Wednesday) due to a subdued growth outlook for FY20.

First on the positives, strong recoveries and provisioning write back of Rs 115 crore in Q4 resulted in gross non-performing assets (NPAs) improving by 180 basis points sequentially to 5.9 per cent. The financier’s net interest income rose by 29 per cent year-on-year to Rs 1,311 crore in Q4, while net profit shot up by a whopping 1.8 times to Rs 588 crore. Net interest margin (measure of profitability) was maintained at 8.1 per cent. A better product-mix with rising share of pre-owned vehicles (margin accretive business) aided Mahindra Finance’s profitability and loan growth in a quarter which was otherwise subdued the automobile sector.

“Rural demand is relatively better and demand concerns are more in the personal vehicle segment. Demand for commercial vehicles is comparatively better. Given our penetration and multi-product approach, we do not see much pressure in our loan growth,” says Ramesh Iyer, vice chairman and MD, Mahindra Finance.

Q4’s robust 43 per cent growth in commercial vehicles lending, cushioned by pre-owned vehicles segment, arrested the year-on-year fall in disbursements to a per cent. On a sequential basis, overall disbursements fell by 12 per cent. Part of the fall is explained by the management’s decision to go slow on lending to small businesses. That said, with overall assets under management (AUM) at about Rs 61,250 crore, up 26 per cent year-on-year, growth prospects remain strong for the lender.

“Strengthening market share, focus on higher-yield products, and maintaining pricing power would enable Mahindra Finance to maintain its return of assets at 2.4 per cent and expand its return on equity (ROE) over FY20-21,” say analysts at Prabhudas Lilladher. ROE currently stand 15.2 per cent. However, analysts warn that how monsoon and central election pan out will be crucial in the near-term.

With these short-term uncertainties, the richly-priced valuation at 2.1x FY20 book captures immediate upside potential for the Mahindra Finance stock.