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Investment Thesis
After witnessing a slowdown in FY09, the revival in the Indian auto sector started FY10 onwards. And going forward, the auto
industry is expected to register strong volumes due to improvement in the economy and conducive financing environment. Within
the auto industry, the car segment is expected to register the highest growth mainly on account of the strong growth in the small
car segment and new model launches at competitive prices.
Conducive financing environment is one of the most important growth drivers of the auto industry. It is so as nearly 70-80%
vehicle sales are backed by loans extended by banks or financial institutions.
Auto finance industry was once dominated by the NBFCs. While banks dominated the low risk car-financing business, NBFCs
dominated the commercial vehicle segment as it was as perceived to be risky. Also, the banks enjoyed an edge over NBFC-funding
due to an easy access to low cost CASA funds (Current and savings account funds). The CASA advantage facilitated the banks
to eat into the market share of NBFCs.
While the auto finance companies are disadvantaged on the cost of funds, they score better in terms of credit assessment skills,
better operational efficiency, higher loan yields and lower regulatory requirements. This result in better return on assets for the
auto finance companies compared to banks.
Considering the growth expected in auto industry particularly in the non-urban areas and the need for finance we believe that
this would bode well for the auto finance companies. Inspite of the growing competition from banks, NBFC’s like Mahindra
Finance and Shriram Transport Finance continue to register robust growth due to their high penetration in unbanked areas, their
competence in understanding the local customer and their recovery capabilities.
We initiate coverage on Auto financing sector with a positive rating. Our top picks are Mahindra & Mahindra Financial
Services Ltd and Shriram Transport Finance Company Ltd. We have a “BUY at Declines” on Mahindra & Mahindra Financial
Services Ltd and “BUY” on Shriram Transport Finance Company Ltd.
Mahindra & Mahindra Financial Services Ltd: With improvement in the macro economic conditions and in the auto sales, we
believe that this is likely to have a positive impact on the disbursement of MMFSL. With improving macro economic conditions,
MMFSL will be a beneficiary of the rising rural demand. We expect the Net interest income to register a CAGR of 19.5% during
FY0-12 and the earnings to register a growth of 16.9% during the same period. Also due to nature of the business we expect the
gross NPA to continue to remain high. We recommend a “BUY at DECLINES” on Mahindra and Mahindra financial services
ltd for a target price of INR502. (2x it’s PBV of INR251 for FY12.)
Shriram Transport Finance Company Ltd: The demand for used CV is expected to increase mainly due to the rapid growth
expected in the new commercial vehicles segment. Shriram being a dominant player in the organised preowned CV market, we
believe that company will be a beneficiary of the rising demand. Further the ample amount of resources and the opportunities in
the construction equipment financing will support AUM growth in future. Improved fee income from new initiatives as well as
sustained asset quality are also factors that would support growth for the company. We initiate coverage on Shriram Transport
Finance Company Ltd with “BUY” recommendation for a target price of INR638 (2.5x its book value of INR255.1 of FY12).
Analyst
Deepti Chauhan
research@acm.co.in
Tel: (022) 2858 3408
Automobile Industry
The automobile Industry witnessed strong growth till 2007-08. However in 2008-
09, there was a drop in the overall volumes, attributed to the economic slowdown
that led to demand contraction in all the underlying segments. Thereafter the
government introduced various stimulus packages, which have helped in revival of
demand. Therefore after 2008-09, the economy started picking up and this resulted
in improvement in sales volume.
Particulars FY05 FY06 FY07 FY08 FY09 FY10 CAGR FY06-10
Passenger cars 819,922 882,094 1,076,408 1,203,102 1,219,384 1,526,787 14.7
7.6 22.0 11.8 1.4 25.2
Utility Vehicles 243,875 261,951 302,863 346,332 330,379 422,989 12.7
7.4 15.6 14.4 -4.6 28.0
Commercial vehicles 318,599 350,553 467,423 490,161 385,144 530,933 10.9
10.0 33.3 4.9 -21.4 37.9
Total 1,382,396 1,494,598 1,846,694 2,039,595 1,934,907 2,480,709 13.5
8.1 23.6 10.4 -5.1 28.2
Source: CRISIL
1525 15.0
15.6
1219 11.0
register a CAGR o 14.1% during 1000 1076
1203
11.8 11.0
14.0
FY10-12. 500
471 523
346 424
303 -4.6 330
0
FY07 FY08 FY09 FY10E FY11E FY12E
Passenger car Domestic Sales Utility vehicle Domestic Sales
Growth in Passenger car sales Growth in UV sales
Source: CRISIL
Going forward as well, the growth momentum is expected to continue in the car and
the UV industry with growth in sales volume estimated at 13-15%. Factors like higher
affordability of people, improved business confidence, rise in disposable incomes
of taxpayers due to sops offered in the latest Union budget and new model launches
at competitive prices in FY10 as well as in FY11 are expected to aid the volume
growth of these segments.
The car and UV industry are dependent on the financing environment, which was
visible in FY09 where high-risk aversion amongst financiers curtailed the growth in
the Industry. However in FY10, there was significant improvement in the financing
environment where the rates of interest softened and the finance penetration (proportion
of vehicles financed) as well as the loan to value (LTV) improved for the segment.
Within the car and UV industry, the finance penetration ranges between 65-70%,
whereas the loan to value ranges between 72-77%.
Going forward with growth in volumes, increase in finance penetration and higher
LTV’s, the car and UV disbursement are expected to witness a CAGR of 21% and
19% respectively during the period FY10-12.
Car Disbursements UV Disbursements
579 198
%
INR Bn
%
501 150 0.0%
400 447 0.0% 148
384 126
304 100 -10.0%
105
200 253 -10.0% 80
50 -20.0%
-14.1% -25.0%
0 -20.0% 0 -30.0%
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Car market Car disbursements Growth UV market UV disbursements Growth
Commercial vehicles
As demand for commercial vehicles is driven by a number of factors such as growth
in industrial and agricultural production, freight movement, share of roadways in
freight movement, changes in freight rates and fuel prices and government policies
etc, the commercial vehicle industry too witnessed sharp contraction in 2008-09 due
to the economic crisis. Thus focus shifted towards increasing utilisation rather than
addition on new vehicles.
Commercial Vehicle Volume-Domestic
350 50%
38% 39% 329
300 40%
292
30%
250 252
246 236 243
221 20%
200
In Thousand
%
150 169 11%
149 0%
2%
100
-10%
-24%
50 -20%
0 -30%
FY07 FY08 FY09 FY10E FY11E FY12E
Commercial Vehicle sales LCV-Goods MHCV-Goods Overall Growth
direclty correlated to IIP. Source: CRISIL, ACMIIL Research
40.0
20.0
0.0
%
-20.0
-40.0
-60.0
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-08
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-09
-80.0
However with revival of economy, the commercial vehicle industry has also started
to witness an increase in volumes. According to CRISIL, financing environment has
also been favourable for the CV industry with interest rate (currently around 10-12
% for MHCV and 15-18 % for LCV) and greater willingness of financiers to finance
CVs as compared to last year.
Going forward, the commercial vehicle volumes are expected to register a CAGR
of 13.1% during FY10-12. The LCV segment is expected to register higher growth
as compared to the MHCV segment mainly on account of increased movement of
LCV segment expected to non-bulk freight by road and launch of new lower tonnage vehicles.
register higher growth Favourable financing environment is also one of the main growth drivers for the
compared to MHCV segment. commercial vehicle industry. CV disbursements fell in 2008-09 on account of fall in
the CV volumes and increase in defaults by the transporters. However with revival
in CV volumes, the CV disbursements are expected to register a CAGR of 13.9%
during FY10-12. Further decline in risk aversion has also resulted in improving the
finance penetration as well as the LTV ratio for the industry. In the CV industry, with
revival in economy and reduced uncertainty with respect to transporters earnings the
loan to value is expected to increase (75-77%). Finance penetration has historically
been high given the nature of the industry (97-98%) as Small Fleet Operators (SFO)
do not have cash to buy vehicles while the LFO (large fleet operators) require cash
reserves for working capital.
%
INR Bn
357
FY10-12. 300 334 -10.0%
261
200 -20.0%
100 -36.9% -30.0%
0 -40.0%
FY09 FY10E FY11E FY12E
Commercial Vechicle disbursements Commercial Vehicle Market Growth in Disbursements
Source: CRISIL. ACMIIL Research
Tractor Industry
Considering the importance accorded to the agricultural sector, the tractor industry
in India is very significant. Tractors are an integral part of mechanization and have
got a crucial role to play in increasing the agricultural productivity. In India, tractors
are utilized for various purposes besides farming.
A farmer’s decision to buy a tractor depends on three factors –
● Value of crop output
● Availability of finance
● Rainfall
Tractor Sales
500 28.0%
21.4%
400
300
In Thousands
8.0% 8.0%
%
200
100 0.7%
-5.0%
0
FY07 FY08 FY09 FY10E FY11E FY12E
Tractor Sales Growth
Tractors play a crucial role
Source: CRISIL
in increasing agricultural
productivity. Linkages with Agri GDP
40.0%
30.0%
20.0%
10.0%
0.0%
%
-10.0%
-20.0%
-30.0%
FY 2001
FY 2005
FY 2003
FY 2008
FY 2006
FY 2009
FY 2002
FY 2004
FY 2007
-40.0%
Tractor Volumes Agri GDP
Source: CRISIL
Tractor sales witnessed strong growth till FY07. Thereafter, the performance of
tractor industry became sluggish as sales declined by 5% in FY08 and registered flat
growth of 0.7% in FY09. This was mainly on account of the economic crisis that
led to alarming levels of NPAs in the Indian banking system. The banks thus went
slow on fresh lending while adopting stringent lending norms. (Interest rates were
revised to double-digit figures, close to those charged on cars and SUVs,. whereas
their earlier average was under 9 %, Margin money, which used to be 10 %, was
revised to 20 %).
Mahindra & Mahindra dominate
Mahindra & Mahindra dominates the tractor industry with 37% domestic market
the tractor industry with 37%
share (including Punjab Tractors Ltd), followed by Tractor and Farm Equipments
domestic market share. Ltd (TAFE) at the second place with 23 % market share. The other two main players
in the domestic market are Escorts Ltd and International Tractors Ltd (ITL).
Going forward the tractor volumes are expected to register growth of 8% for FY11
and FY12 due to rising farm income, improved financing environment, government
initiatives towards rural development.
Tractor financing plays an important role in the prospects of the tractor industry as out of
the total tractors sold in India, 85-90 % of the tractors are purchased on finance. Therefore
the finance penetration is 80% for tractors and the loan to value is 65-70%. The tractor
disbursements are expected to grow at a CAGR of 10.2% during FY10-12.
Tractor Disbursements
200 20.0%
15.6%
Tractor disbursements 150
150
165 15.0%
expected to register a CAGR of 10.2%
136 10.2%
10.2% during FY10-12. 100 118 10.0%
INR Bn
90
%
74 82
50 5.0%
64
2.4%
0 FY09 FY10E FY11E FY12E
0.0%
● Class of consumers
NBFC’s serve consumers, which are perceived to be risky and high NPA prone
as per the banking standards. For example Mahindra finance serves consumers
from the rural areas, which are unable to meet the documentation requirements of
the banks. Further companies like Shriram transport finance are into financing of
preowned vehicle which although are high yielding segment but are considered
to be risky due to poor credit history of the customers. Therefore banks generally
stay away from this class of consumers, which acts as an advantage for these
NBFC’s.
Shriram
Sundaram
Kotak Mah.
M & Mah.
HDFC
Bank
St Bk Of
Financial
Bank
ICICI
Trans.
Finance
India
Bank
Source: Company Data, RBI, ACMIIL Research
They operate at higher cost efficiencies than banks. NBFCs enjoy higher leeway on
assets and liabilities when compared to that of tightly regulated banks. That gives
NBFCs better flexibility in product selection as well as in pricing their services.
● Reach into a number of non-metro locations;
In Billion FY2005 FY2006 FY2007 FY2008 FY2009
Total loans and advances 11250.6 14737.2 18937.8 23320.0 27935.7
Retail portfolio of banks 2666.1 3756.8 4878.6 5707.8 5938.2
Auto Loans 350.4 613.7 825.6 880.0 839.2
Retail loans/Total loans 23.7 25.5 25.8 24.5 21.3
Auto Loans/Total Loans 3.1 4.2 4.4 3.8 3.0
Source: RBI
HDFC Bank, SBI and ICICI bank together account of almost 50% of the auto
loan market within Banks
Bank Retail Loans as on March 2009 % to total
Total Auto Loans 839 100
HDFC Bank 180 21
ICICI Bank 150 18
SBI Bank 97 12
Kotak 81 10
Others 331 39
Auto finance companies have Source: Company Data, ACMIIL Research
major presence in rural areas.
Branch Network of these Banks
Branch presence Kotak ICICI bank HDFC Bank SBI MMFSL
Total Branches 180 1408 1400 11447 436
Rural 11 138 65 4353 343
Semi urban/Urban 70 860 792 5322 89
Metro 99 410 543 1772 4
Rural 6% 10% 5% 38% 79%
Semi urban/Urban 39% 61% 57% 46% 20%
Metro 55% 29% 39% 15% 1%
Source: Company Data, RBI, ACMIIL Research
Although the share of banks in auto financing segment is o rise, the share of auto loans
in total portfolio of banks has remained in the range of 3-4% as can be seen from
the above table. Also most banks, which have significant exposure to the auto loan
market, have got their presence in metros. On the other hand, the NBFCs have got
major presence in the rural areas. Therefore, it works as an advantage to the NBFCs
as they are able to serve customers based in unbanked and remote areas. Also, future
growth from rural areas bodes well for the NBFC’s.
Conclusion
Private Bank PSU Bank Standalone NBFC Captive NBFC
2009 HDFC SBI Shriram Transport Magma Shrachi Finance Mahindra Finance Bajaj Auto Finance
Yield 12.8* 11.3* 17.2 15.4 20.2 16.7
Cost of Funds 5.1 6.0 11.4 11.8 9.9 10.0
Spreads 7.7 5.2 5.9 3.6 10.3 6.6
ROA 1.4 1.0 3.0 1.3 3.3 1.2
Net NPA 0.6 1.8 0.8 0.0 2.6 0.0
Time to process loans 2 days 4 -7 days 2 days 2 days
Source: Company data, ACMIIL Research. *Yields on car loans
While the auto finance companies are disadvantaged on the cost of funds, they score
better in terms of credit assessment skills, better operational efficiency, higher loan
yields and lower regulatory requirements. This result in return on assts for the auto
finance companies for auto finance companies in this segment compared to banks.
Auto finance companies Considering the growth expected in auto industry particularly in the non-urban areas
score in terms of better credit and the need for auto finance, we believe that this would bode well for the auto finance
assessment skills. companies. Inspite of the growing competition from banks, NBFC’s like Mahindra
Finance and Shriram Transport Finance continue to register robust growth due to
their high penetration in unbanked areas, their competence in understanding the local
customer and their recovery capabilities.
Company
Well Positioned in the rural market
MMFSL has positioned itself between the organized banking sector and local
moneylenders, offering customers competitive, flexible and speedy lending services.
Banks and local moneylenders primarily provided credit in rural markets. However
due to the various documentation and other requirements, the banks are unable
to provide adequate credit to the rural consumers. And, the moneylenders charge
MMFSL positioned itself excessive rates. MMFSL identified this as an opportunity.
between organized banking MMFSL adopted procedure, which were not as stringent as banks. Also the rates of
sector and moneylenders. interest were fixed between those charged by banks and moneylenders. The company
follows a subjective assessment for determining the repayment capability of the
borrower on the basis of his occupation, ownership of land, type of crops sold etc, for
disbursing the loans. A great deal of emphasis is placed on customizing the product
for the customers keeping in mind his expected cash flows and other consideration.
The objective is to minimize the time take for approval without compromising on
the quality. The loans are processed within two days of application.
The business is based on a cash collection model whereby the employees visit the
houses of the respective borrowers to collect repayments. This we believe can act as
an entry barrier in rural area with underdeveloped banking habits.
Network
MMFSL has a pan India network of 459 branches spread over 25 states and 2 union
territories in India covering almost 90% of the districts in India. Majority of its
branches are spread in rural and semi-urban areas.
Total Branches 459
Metro 4
Urban/Semi-urban 90
Rural 365
Source: Company
MMFSL has a got well-diversified portfolio. The company finances utility vehicles,
tractors, cars, commercial vehicles and pre-owned vehicles. Passenger vehicles (cars),
utility vehicles and tractors are the key segments for MMFSL, constituting 85%
share of the total disbursements. Initially, the company started with financing UV
and tractor manufactured by M&M and thereafter entered into CV and car financing.
The share of CV and car financing in the disbursements has increased over the past
few quarters.
MMFSL maintains a policy of financing only 40% of the M&M sales. This has helped
MMFSL in capping its risk in case of a slow down in M&M sales.
Disbursement Mix
60%
22% 22%
% 50% 22%
20% 21%
19%
40%
30%
20% 41% 40% 39% 35% 36% 35%
10%
0%
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
Auto/Utility vehicles Tractors Cars Commercial Vehicles Refinance and Others
Source: Company, ACMIIL Research
Disbursement Mix
● Tractor financing
MMFSL was predominantly engaged in providing financial assistance to the
farmers for buying tractors and farm equipments. However, 2005 onwards MMFSL
diversified its lending portfolio and started financing UVs, CVs and two-wheelers
as well. Tractors comprise of 23% of the total AUM as on March 2010.Tractor
financing plays an important role in the tractor industry as out of the total tractors
sold in India, 85-90% of the tractors are purchased on Finance. MMFSL finances
tractor sold by M&M and PTL only.
M&M is a leading player in the tractor Industry. After acquisition of PTL, M&M
Tractors comprise 23% of the improved its market share to 42% in 2008-09. During FY09, M&M registered
total AUM of MMFSL. tractor sales growth of 25.2% in the domestic market against flat growth registered
by the Industry. In FY10, the company’s YTD domestic sales have registered a
47% YoY growth at 165633 units. The acquisition of Punjab Tractors by M&M
is expected to increase disbursement for the tractor segment of MMFSL.
Due to seasonal nature of the business, delinquencies are higher in the tractor
segment being directly linked to agriculture. MMFSL maintains a lower LTV of
~68% and higher provision coverage to contain defaults. The tractor segment
has the highest average yields of 19-20%. Since tractor financing is classified as
agricultural finance, banks buy these assets from MMFSL at a discount to meet
their priority sector lending targets. This in turn enables MMFSL to free cash
flows, reduce its borrowings and thereby it’s cost of funds.
MMFSL finances tractors only for its parent. Going forward we expect the tractor
segment of M&M to register a 9% CAGR in volumes during FY10-12. Further
since MMFSL finances ~30% of tractor sales of M&M and assuming a LTV of
68%, we expect the tractor loans to grow at a CAGR of 11 % during FY10-12.
witness a change with many auto companies contemplating to enter the pre-owned
car market. Companies such as Mahindra First Choice, Popular Car World and
Maruti True Value are aggressively focusing on the franchising route to spread
across the country. Besides them, other car manufacturing companies such as
General Motors (GM), Hyundai Motors, Ford, Porche, and Carnation Auto have
also ventured into the pre-owned car industry to target the maximum share in
the market.
Refinancing loans comprise 6% of the total AUM as on March 2010. Since the
valuation of the pre-owned vehicle is subjective, MMFSL lends in this segment
at premium yields of ~19%.
Outlook on Loan Book
Going forward we expect the loan book to grow at a CAGR of 17.9% during FY10-
12 on the back of improving macroeconomic conditions and robust auto sales. Car
Expect MMFSL loan book to financing, CV financing (including construction equipment financing) and refinance
grow at a CAGR of 17.9% during segment are expected to be the major growth drivers. The company intends to increase
FY10-12. the composition of the CV financing in the total AUM from 8% at present to 13% in
the next three years. The management also foresees lot of potential in the financing
of preowned vehicles. The management has also indicated its plans of foraying into
a new segment of gold loan financing.
0.0 0%
FY08 FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Loan Book Growth Auto/Utility vehicles Tractors Cars Refinance and Others Commercial Vehicles
Source: Company, ACMIIL Research
Borrowing Profile
MMFSL borrows through diverse sources in the form of banks, bonds, commercial
papers and fixed deposits. Borrowing profile is skewed towards bank borrowings.
Apart from bank borrowing securitization also helps meet funding needs of the
company. Almost ~45% of the loan book of MMSL is eligible for being classified
under priority sector lending. Since banks have to meet their priority sector lending
Securitization as a tool to meet targets, they readily purchase these securitized assets at a discount. MMFSL is able
funding needs of the company. to obtain discount of its borrowing cost from Banks on securitization of such assets.
With better cash flows and reduced borrowings, securitization of assets also helps
contain cost of funds.
With RBI hiking the rates, the banks are expected to increase their lending rates.
57% of its borrowings are from banks, however this is less likely to have an impact
on the cost of funds for the company as it has raised funds at lower cost during the
last year. Further the company intends to increase the share of fixed deposits in the
total borrowings from 7% at present to 10% by FY12.
Borrowing Profile
80%
Borrowing Profile skewed 43.7 46.0 49.0 50.0
towards bank borrowings. 60% 57.0
%
40%
51.4 50.4 45.9
20% 43.4
33.7
0%
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
Bonds/NCD's Banks Others
Source: Company
Credit rating
MMFSL has consistently enjoyed a good credit rating enabling it to borrow funds at
competitive rates. At present, FITCH has assigned AA (ind) rating and CRISIL has
assigned a AA- rating to the Company’s long term debt, which is also linked to credit
rating of M&M. Due to the poor economic condition in FY09 and subdued performance
of the parent the credit rating agencies downgraded rating for MMFSL. However we
believe that with improvement in the economic conditions and operating performance
of M&M, there is a possibility of revision in the credit rating for MMFSL.
Margins to remain stable.
MMFSL has reported net interest margins of 12.9% in FY10 mainly led by lower
Margins to remain stable at borrowing cost, lower level of NPAs and higher amount of securitisation towards the
12.9% ends of 4QFY10. With RBI hiking the rates, the banks are expected to increase their
lending rates. 57% of its borrowings are from banks, however this is less likely to
have an impact on the cost of funds for the company as it has raised funds at lower
cost during the last year. We expect our NIM’s to remain stable at 12.9% over the
next two years.
Asset Quality
MMFSL follows a relatively stringent provisioning policy.
Duration (Months) RBI Norms Duration (Months) MMFSL norms
>5 and <=18 10% >5 and <=11 10%
>18 and <=30 20% >11 and <=24 50%
>30 and <=54 30% >24 months 100%
>54 months 50%
Source: Company
MMFSL operates in the rural and semi-urban areas where the population depends
NPA expected to be high due to on agriculture. The agricultural sector is highly seasonal mainly due to the abnormal
the very nature of the business. monsoons, which result in uncertainty in income levels. This results in delayed and
irregular payments. On important point to note that the NPA’s are mainly seasonal
and are in the form of delayed payments. The final credit write off’s as per the
management has been ~2% of the loan book.
The gross NPA have declined from 7.6% in FY08 to 6.4% in FY10. The Net NPA’s
have improved significantly from 2.9% in FY08 to 0.9% in FY10. Over the period,
MMFSL has improved its provision coverage from 63% in FY08 to 86% in FY10.
The improvement in gross NPA is on account of improved economic scenario which
coupled with a good rabi crop season have aided in containing incremental slippages
and also improving recoveries.
Further the management has indicated that one of the reasons for improved cash flows
has been usage of vehicles for commercial purposes rather than for farm purposes.
This we believe would bode well for the asset quality.
Due to the nature of the business, the gross NPA’s are expected to be high, however
the company intends to maintain its Net NPA at 3% levels while maintaining higher
provisioning.
Capital adequacy
MMFSL well capitalized
MMFSL has a capital adequacy ratio of 18.5% as on March 2010 against the
requirement of 12%. With improved profits and loan CAGR of 17.9%, we believe that
the company is well capitalised and will require to raise equity only post FY12.
Other initiatives
Insurance brokerage business - Mahindra Insurance Brokers (MIBL)
MIBL is the wholly owned insurance broking arm of MMFSL for both life and
non-life products. MMFSL is leveraging on its broad network of branches to offer
these financial products in the rural markets. The non-life product segment largely
comprises of motor insurance primarily in the rural markets.
Rural housing loan business- Mahindra Rural Housing Finance (MRHFL)
Mahindra Rural Housing Finance is a wholly owned subsidiary of Mahindra &
Mahindra Financial Services Ltd (MMFSL), which was set up with the objective
of meeting the housing finance requirements of rural and semi urban customers.
MRHFL intends to capitalize on MMFSL’s reach for creating a niche in the rural and
semi urban markets for housing finance. The company has launched operations in all
MRHFL intends to capitalize on southern states on India in addition to states of Maharashtra and Gujarat.
MMFSL’s reach.
Despite the difficult market condition in FY09, the company disbursed Loan worth
INR430 million in FY09 against INR30 million in FY08. Upto Dec 2009 the company
has sanctioned loans worth INR1118 million. Going forward, the management is
targeting a AUM of INR10, 000 million by FY13.
At present the contribution from these segments is insignificant, therefore we have
not factored any potential revenues from these segments in our future earnings
estimates.
Key Concerns
Dependency on Mahindra & Mahindra Ltd.
The company finances the acquisition of Mahindra utility vehicles and tractors. Hence
any major reduction in sale of Mahindra utility vehicles and tractors will also affect
the business of the company.
High level of NPA’s
MMFSL operates in the rural and semi-urban areas where the population depends
on agriculture. The agricultural sector is highly seasonal mainly due to the abnormal
monsoons, which result in uncertainty in income levels. This in turn may result in
high level of gross NPA’s.
High revenue leakage
Since the business model of MMFSL is based on cash collection model wherein the
employees of MMFSL visit the respective borrowers house to collect repayments from
them. This exposes MMFSL to the risk of fraud and misappropriation of funds.
450
400
350
300
250
200
150
100
50
0
2/2/08
4/2/08
6/2/08
8/2/08
10/2/08
12/2/08
2/2/09
4/2/09
8/2/09
10/2/09
12/2/09
2/2/10
4/2/10
4/2/07
6/2/07
8/2/07
10/2/07
12/2/07
6/2/07
Ratios
FY09 FY10E FY11E FY12E
Spreads
Cost of Borrowings 9.9% 8.6% 8.9% 9.2%
Yield on Advances 19.4% 19.2% 19.3% 19.6%
Net Interest Income 9.5% 10.6% 10.4% 10.4%
Net interest margins 12.1% 12.9% 12.9% 12.9%
Profitability ratios
Return On Average Assets (ROAA) 3.3% 4.6% 4.6% 4.5%
Return On Average Net worth (ROANW) 15.4% 21.4% 22.2% 23.6%
Balance sheet ratios
Loan to borrowings ratio (%) 131.2 129.7 131.6 127.4
Debt/Equity Ratio (Times) 3.5 3.7 4.0 4.4
Growth Ratios
Borrowings 2.9% 23.9% 16.5% 21.6%
Loans 2.9% 22.5% 18.2% 17.7%
Networth 11.8% 22.2% 15.8% 15.9%
NII Growth 14.0% 20.4% 20.3% 18.7%
EPS 20.5% 59.3% 17.1% 16.7%
Valuation ratios
EPS (Rs.) 22.4 35.7 41.8 48.8
Book value (Rs.) 153.5 187.1 216.7 251.2
P/E (X) - - 12.0 10.3
P/BV (X) - - 2.3 2.0
Dividend per share 5.6 7.6 10.5 12.2
Source: Company, ACMIIL Research
BUY
03 May, 2010
Shriram Transport Finance Company Ltd
Key Data (INR) Background
CMP 572 Shriram Transport Finance Company Ltd., a flagship company of the Shriram Group
Target Price 638 was established in 1979 and provides commercial vehicle finance to customers in
excess of 0.6 million across India. The company has niche presence in financing pre-
Key Data
owned trucks and small truck owners (STOs). On March 31, 2010 the company had
Bloomberg Code SHTF IN
a network of 484 branches and service centers across the country. Its main products
Reuters Code SRTR.BO
include financing of pre owned, commercial and passenger vehicles, along with three
BSE Code 511218
wheeler, tractor, construction and multi utility vehicles.
NSE Code SRTRANSFIN
It has around a 20-25% market share in pre-owned commercial vehicle (CV) financing
Face Value (INR) 10
and approximately 8% in new CV financing market.
Market Cap. (INR Bn.) 129
500.0
20.0%
10.0%
400.0
In Thousand
300.0 0.0%
%
4.9%
200.0
-20.0%
100.0 -21.4%
0.0 -40.0%
FY06 FY07 FY08 FY09 FY10
Commercial vehicles Sales Growth
Source: CRISIL
With revival of economy, the commercial vehicle industry has started to witness an
increase in volumes. According to CRISIL, financing environment has also been
favourable for the CV industry with interest rate (currently around 10-12 % for
MHCV and 15-18 % for LCV) and greater willingness of financiers to finance CVs
as compared to last year. Further their interactions with industry players indicates
that CV industry has experienced some pre-ponement in purchases in the current
quarter due to the following reasons:
● Expected roll back of excise duty in the Union Budget 2010-11
● Expectation of hike in interest rates for vehicle purchases (the interest rates have
been hiked by around 50 basis points by majority of players recently).
● Increase in CV prices due to the implementation of new emission norms.
Within the CV market, Light commercial vehicle (LCV) grew by 36% YoY while
the Medium and Heavy commercial vehicles grew by 26%. The performance of the
LCV was better as compared to the MHCV segment.
Share of MHCV on Decline
0.0
FY05 FY06 FY07 FY08 FY09
LCV MHCV
Source: CRISIL
The share of LCV’s is on the rise in the commercial vehicle segment mainly due
to the hub and spoke model of transportation where the MHCV are used for long
distance hauls and pickups are used for the last mile logistics. Demand in the LCV
segment is expected to be robust and is expected to drive demand for the Commercial
vehicle segment mainly due to the increased movement of non-bulk cargo by road
and launch of lower tonnage vehicles (such as Mahindra Gio).
Commercial Vehicle Financing Industry
Commercial Vehicle finance industry has assumed significant importance since almost
90% of vehicles sold by vehicle manufacturers are financed. The CV financing industry
can be divided into two segments.
● New CV financing
● Pre Owned CV financing.
New CV market Used CV market
Age of the CV 0-5 years Above 5 years
Type of transport operator Large Fleet operator (LFO). Small Fleet Operator (SFO), First Time User (FTU)
Haulage Long haul, Metros, Major cities. Last mile, short haul routes, interstate
Loan Yields 12-13% 17-20%
Loan to Value 85-90% 65-70%
Major financiers Banks NBFC’s
Source: CRISIL.
New CV financing.
In the new CV finance Industry, operators are classified into single truck or small
fleet operators-SFO (those who own up to 1-5 trucks), First Time users (FTU) and
large fleet operators-LFO (owning over 20 trucks).
Banks increasingly finance LFO’s usually prefer to have a large component of new CV’s in their owned truck
new commercial vehicles. fleet. This is due to the fact that new CV’s despite high EMI’s have low maintenance
cost and thereby translates into higher profits.
According to CRISIL Research, while banks increasingly focus on the LFO, the SFO
and FTU segments are catered to by the NBFC’s. This is mainly because the SFO and
FTU have no proper documentation and are perceived to be risky in nature.
Preowned Commercial vehicle financing market
The pre-owned vehicle-financing segment highly fragmented, collections are usually
done in cash, customers are mostly SFO and FTU and is perceived to be higly risky
in nature. NBFC are the major financiers to the preowned segment as banks stay
away from these assets.
The buyers of the used CV are usually the SFOs and the FTUs. The trends in truck
Unorganised players cater ownership pattern suggest that the SFOs own more than 70 % of the truck fleet. One
to the bulk of used truck typical characteristic of the SFO’s is their absolute dependence on brokers for business
financing. on account of their small size of operations, lack of distribution network and necessary
infrastructure. SFO mostly depend on LFOs to get contracts. Their bargaining power
is relatively less. It thus reduces their affordability to purchase new CVs.
Unorganised players cater to the bulk of demand for used truck financing. Though
organised players are increasingly entering the market they have restricted their
operations to financing trucks aged between 0-4 years. In the 5-12 year old truck
financing, which is STFL’s key area of focus, competition from organised players
is non-existent.
Company
Business Model
Pre Owned (5-12 years Old CV’s) New Cv’s Market Share of 7-8 %.
Market Share of 20-25%. AUM-INR222 bn AUM-INR70 bn
Source: Company
Unique business model
STFCL has developed a strong understanding of the second hand truck market and
enjoys a market leadership position with a majority share in the organised sector.
STFCL command 20-25% market share of the used truck financing and 7-8% market
share of the new truck financing.
The Company has developed strong competencies in the areas of loan origination,
valuation of pre-owned trucks and collection. In the used CV finance market the key
success factors for the financiers depend on their knowledge about the asset class
and the customer profile. The financiers should also posses sufficient knowledge
about repayment capabilities of borrowers. These customers possess underdeveloped
banking habits; their cash flows are higher irregular and lack collaterals. These
competencies have enabled STFCL to maintain high growth rates and adequate quality
(low NPA levels) in a business that is perceived to be risky.
Efficient Collection Mechanism
As mentioned above, the collection mechanism is also one of the important
competency to be developed by a used CV financier. Majority of the truck owners
50% of salary of field officer STFCL finances have underdeveloped banking habits, therefore the business model
linked to timely collection of involves cash collection from its customers. STFCL has evolved a efficient system of
receivables. cash collection mechanism whereby 50% of the salary of its field officer is variable
in nature and linked to timely collection of receivables. This not only enabled the
company to maintain direct contact with customers but also enabled help reduce the
maintain NPA at very low levels.
Branch Network
Branch Network
Central North
11% 15%
West
18%
South
East 47%
9%
Source: Company
will stem from stricter regulations on overloading and emissions. Going forward we
expect the new CV disbursements to grow at a CAGR of 10.1% during FY10-12.
We expect the preowned CV segment to register a CAGR of 19.5% during the same
period. We expect STFCL’s disbursements to grow at a CAGR of 17.7%.
Disbursement Mix
250
179
%
151 40%
100 82
20%
The loan book has registered a 30% CAGR during the period from FY07-10. The
loan book is expected to grow at a CAGR of 33% during FY10-12. Although the
pre-owned vehicles are expected to dominate the book, the construction equipment
financing is also expected to drive AUM growth n future. At present, the construction
equipment portfolio of INR25 billion constitute less than 10% of the AUM. However
with formation of a separate subsidiary, we expect ramp up in the construction
equipment portfolio and expect the size of the portfolio to increase to INR42 billion
by FY12.
Borrowing Profile
Borrowing Profile
120.0
4000
1.2% 1.5%
Exposure to segment highly 3000
sensitive to economic cycles 0.9%
%
In Mn
1.0%
0.7%
low 2000
0.7%
0.5%
1000
0 0.0%
FY06 FY07 FY08 FY09 FY10
Gross NPA Net NPA Net NPA as % to Net advances
Source: Company
STFCL has maintained its asset quality with gross NPA’s in the range of 2-2.5%. This
is mainly because exposure to the segment which is highly sensitive to economic
cycles in low for STFCL. Further the collections mechanism also aids in maintaining
the quality.
Capital Adequacy
Ample amount of liquidity. The company has ample liquidity with itself at present. The company has completed
a INR5.84bn QIP at a price of INR500.8, it has cash of INR45 billion as on March
2010, and has also raised NCD worth INR10 billion in FY10. The company has a
capital adequacy ratio of 20.9% at present against the minimum required by RBI of
12%. Therefore with all these cash inflows we believe that the company has sufficient
funds and would enable the company to fund its new initiatives and also help reduce
the debt equity.
New Ventures
● Auto Malls &Electronic Touch Screen Kiosks.
Shriram plans to set up 50-60 Auto Malls over the next 12-15 months. Auto Malls
are being set up in the forms of hubs for selling of repossessed used CVs. STFCL
repossess on an average 7000-8000 vehicles annually. These would be sold
through these auto malls. The company would also sell repossessed vehicles of its
competitors in these malls on which it expect to earn a commission.
It also plans to buy some vehicles from other financiers and yard sales, and re-
brand them as “Shriram New Look” after retrofitting them.
STFCL has been holding a monthly Truck Bazaar, a marketplace for meeting of
potential buyers and sellers of CVs. It plans to replace the same by Electronic
Touch Screen Kiosks, which shall be stationed at these auto malls. There would
be an auction room in every auto mall that would accommodate about 200 people.
Each mall would have an electronic display screen displaying multiple–angle
photographs of vehicles, and an auction will take place. This could lead to a better
price search mechanism. Further it also provides an avenue for the company to
STFCL’s new ventures to earn fee income.
provide an avenue to earn fee ● Partnering with private financiers
income. STFCL has tied up with about 500 other private financiers across the country.
These private financiers account for bulk of lending in the preowned vehicles
segment. As part of the arrangement, the private financier is responsible for
acquiring customers, collecting payments and pitching in with about 10-20 % of
the loan amount. The remaining part of the loan is extended by Shriram Transport
Finance. These private financiers are typically constrained for growth due to lack
of access to capital. This will enable Shriram to grow its AUM with the help of
the private financier. At present, these type of loans constitute ~10% of the loan
book of STFCL. The company has plans to increase this to 15-20% over the next
3 years and also would increase the tie ups to ~2500 financiers.
● Construction equipment Financing
The company is expanding its construction equipment-financing portfolio.
Management believes there is lot of potential in this segment. The company has
formed a 100% subsidiary for the same. At present the construction equipment
Size of construction equipment
portfolio forms less than 10% of the total loan book. With pick up in the
potfolio to increase.
infrastructure spends and also exit of some of banks from this space, we believe
demand for construction equipment financing to increase. We expect ramp up
in the construction equipment portfolio and expect the size of the portfolio to
increase to INR42 billion by FY12 from INR25 billion at present.
600
500
400
300
200
100
0
2/2/08
4/2/08
6/2/08
8/2/08
10/2/08
12/2/08
2/2/09
4/2/09
8/2/09
10/2/09
12/2/09
2/2/10
4/2/10
4/2/07
6/2/07
8/2/07
10/2/07
12/2/07
6/2/07
Key Ratios
FY09 FY10E FY11E FY12E
Spreads
Cost of Borrowings 11.3% 11.6% 11.7% 11.8%
Yield on Advances 22.2% 24.6% 23.5% 23.6%
Net Interest Income 10.9% 12.9% 11.8% 11.8%
Net interest margins 10.6% 12.1% 11.4% 11.5%
Profitability ratios
Return On Average Assets (ROAA) 3.1% 3.9% 4.1% 3.8%
Return On Average Net worth (ROANW) 29.6% 28.4% 25.2% 25.0%
Balance sheet ratios
Loan to borrowings ratio (%) 89.0 97.2 96.9 97.4
Debt/Equity Ratio (Times) 8.7 4.8 5.5 5.7
Growth Ratios
Borrowings 36.2% -8.3% 41.3% 24.9%
Loans 18.8% 0.2% 40.9% 25.5%
Networth 27.5% 65.9% 22.4% 22.3%
NII Growth 45.4% 28.5% 14.4% 32.2%
EPS 56.8% 28.6% 23.1% 21.8%
Valuation ratios
EPS (Rs.) 30.1 38.7 47.7 58.0
Book value (Rs.) 113.8 170.4 208.6 255.1
P/E (X) - - 13.4 11.0
P/BV (X) - - 3.1 2.5
Dividend per share 5.0 5.4 8.1 9.9
Source: Company, ACMIIL Research
Notes:
Institutional Sales:
Ravindra Nath, Tel: +91 22 2858 3400
Kirti Bagri, Tel: +91 22 2858 3731
Himanshu Varia, Tel: +91 22 2858 3732
Email: instsales@acm.co.in
Institutional Dealing:
Email: instdealing@acm.co.in
Disclaimer:
This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or any of its affiliates or
employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in the report. ACMIIL and/or
its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency we have incorporated a Disclosure of
Interest Statement in this document. This should however not be treated as endorsement of the views expressed in the report
Disclosure of Interest Mahindra & Mahindra Financial Services Ltd (MMFSL) Shriram Transport Finance Company Ltd
This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for circulation. This document
is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security. The information contained herein is from
sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may from time to time have positions in and buy and sell securities
referred to herein.
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