Paying five times the adjusted book value for the rural reach it commands is very costly
Mahindra & Mahindra Financial Services (MMFS) is one of India’s leading non-banking finance companies focused on the rural and semi-urban sector providing finance for utility vehicles (UVs), tractors and cars. It is a subsidiary of Mahindra & Mahindra (M&M), a leading tractor and UV manufacturer.
The objects of the issue are to achieve the benefits of listing, providing liquidity to present shareholders and augmenting Tier I capital base for further asset growth. The two crore equity-share public issue of face value Rs 10 each comprises a fresh issue and an offer for sale for one crore equity shares by M&M. The pre-issue promoter (M&M) holding, which stands at 89.8%, will come down to 67.7% post issue. The issue will constitute 23.26% of the fully diluted post-issue paid-up capital of the company.
MMFS aims to become the preferred provider of retail financing services in the rural and semi-urban areas of India by leveraging its nationwide distribution network. It seeks to position itself between the organised banking sector and local moneylenders. The company predominantly finances M&M UVs and tractors for commercial and personal purposes and plans to expand its lending for M&M vehicles.
Strengths
* Enjoys the brand equity and a ready market provided by M&M.
* MMFS has a superior nationwide network (295 branches end December 2005) compared to its peers, which it can leverage to its advantage. It will also benefit from the government’s focus on agriculture and rural development as tractors and UVs play a significant role in rural activities.
Weaknesses
*NPAs as a percentage of total assets (at 3.7% of net advances end December 20’05) are on the higher side compared to its peer group.
* MMFS’s credit rating at AA+ is not in the highest slab. Bajaj Auto Finance and Sundaram Finance enjoy higher ratings.
*Tractor & UV sales tend to be cyclical and affected by monsoon.
*MMFS faces severe competition from banks, adversely affecting its margin. The gross spread has come down continuously, from 12.9% in FY 2003 to 8.7% in the latest nine months. The return on average assets has also come down from 3.5% to 2% in this period.
Valuation
Among its peer group comprising Bajaj Auto Finance, Cholamandalam Investment & Finance and Sundaram Finance, MMFS has the best nationwide network. At the price band of Rs 170 to Rs 200, the scrip is at (18.2 to 21.4) x its FY 2005 EPS of Rs 9.3 (on post- issue equity and after deducting the preference dividend) and (3.4 to 3.9) x its FY 2005 book value(BV) of Rs 51 (on pre-issue BV end March 2005) and (4.7 to 5.5) x its FY 2005 adjusted BV of Rs 36 (on pre-issue book value end March 2005).
The valuations are high compared to the net profit growth of 26% in FY 2005 and just 15% in the latest nine months. The peer group gets a PE of 14.6 to 25.3 and P/BV of 1.4 to 3.3. However, the peer group valuations also factor in stakes of these companies in mutual fund and insurance business. MMFSL does not have any such stakes.
Besides, banks are better placed compared to NBFCs in the financing business and PSU banks are better placed in rural finance. Compared to the valuations of banks, NBFCs are getting very high valuations, which may not be sustained in the long run.