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Mahindra & Mahindra Financial Services Ltd signage is displayed outside one of the company’s branches in
Mumbai Mahindra and Mahindra Financial Services' (MMFS) net profit was hit by surge in provisioning in the quarter ended December 31. Its standalone net profit fell 18 per cent to Rs 164 crore over last year and was significantly lower than Street expectations of Rs 242 crore. Its loan provisioning and write-offs grew by 120 per cent year-on-year (up 42 per cent sequentially) to Rs 180 crore as cash-flows of borrowers in Southern India were impacted, resulting in delayed payments. Thus, the company had to classify such loans as NPAs. Consequently, its gross non-performing assets (NPA) ratio inched up to 4.7 per cent from 4.1 per cent in the September 2013 and December 2012 quarters.
Ramesh Iyer, managing director, MMFS, says, “Delay in announcement of minimum support prices of soya and cotton due to elections has put pressure on borrowers’ cash-flows in the rural market. We have also repossessed some of the heavy commercial vehicles (CVs), as that market has not shown any signs of improvement. These disposals were at a loss. We also witnessed some strain in our three-wheeler portfolio.”
According to the management, the company is seeing positive signs in Andhra Pradesh, as the MSPs are fixed. Madhya Pradesh and Maharashtra have also witnessed turnaround in asset quality trends and more improvement is expected. Given the good monsoon, the management remains positive on the asset quality.
Meanwhile, net interest margins, an indicator of profitability, too, came down from 8.9 per cent in the September 2013 quarter to 8.4 per cent. The weaker profits eclipsed a strong 27.1 per cent year-on-year growth in standalone total operating income (Rs 1,266 crore), which was led by robust disbursement growth of 14 per cent. Strong growth in tractors (parent M&M forms 45 per cent of the company’s total loan book), coupled with higher market share in the cars segment (Maruti, Toyota, etc) fuelled disbursement growth. Given the weak outlook of the CV industry, MMFS has slowed lending to this segment.
Notably, even after excluding provisions, the profits were lower as other expenses climbed 39 per cent year-on-year to Rs 180 crore. These were driven by one-off items such as Rs 9 crore toward television advertising (to support direct marketing initiatives), higher charges towards recovery (Rs 4-5 crore) and some additional statutory requirements such as higher stamp duty in select states.
The disbursement and assets under management growth is likely to be in line with recent trends, believe analysts. The management remains positive on asset quality and expects gross NPAs to fall from current levels of 4.7 per cent to 4-4.1 per cent. However, analysts remain divided. Some are sceptical on the company’s prospects and after the significantly lower results, are pruning their full year earnings estimates.
Dhananjay Sinha, head, institutional research, Emkay Global, says, "The results were disappointing due to higher provisioning. We will lower our earnings estimates post these numbers". He has a ‘Sell’ rating on the stock with a target price of Rs 216.
Whether the results are just a blip or not will be known in a quarter or two.
The stock, meanwhile, fell 4.9 per cent on Wednesday to close at Rs 253.95. It now trades at 2.6 times FY15 estimated book value. This is closer to the upper band of the 1.6-2.8 times one-year forward price/book value that the scrip has traded over the past two years. Given the near-term issues and valuations, it could slip further to some extent in the coming days.
Of 14 analysts polled by Bloomberg since December 2013, six have a ‘Buy’, four have ‘Sell’ and the rest have a ‘Hold’ rating on the stock. Their average target price stands at Rs 287.
On a consolidated basis, total income was up 28 per cent year-on-year to Rs 1,359 crore while net profit was down 15.6 per cent at Rs 182.4 crore for the December 2013 quarter.
