Mahindra Finance: where is the rural recovery?
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Enough has been said about the changing fortunes of India’s rural economy and how all the non-bank lenders focused on villages will begin to see a rapid recovery 2016-17 onwards.
The stock price of several non-banking financial companies have galloped.
Mahindra and Mahindra Financial Services Ltd (Mahindra Finance) has run-up 20%, outpacing the Sensex over the last six months.
The rise hasn’t abated even after the company posted a mixed set of numbers for the September quarter last week.
Mahindra Finance’s disbursals grew 29% for the second quarter that led to an impressive 14% growth in assets under management (AUM), the fastest in four quarters for the company and this seems to have pleased its investors.
Although the net profit took a beating and fell 35% from a year ago to Rs948 crore, it was forgiven after the management indicated better days lie ahead in terms of recovery.
Indeed, given the cyclical nature of Mahindra Finance’s portfolio and that AUM growth was broad based, there is little reason to mistrust the management’s outlook.
But one look at the asset quality of the September quarter shows the picture is far from rosy. Gross non-performing assets (NPAs) grew by a massive 35% to form 11% of the loan book as of 30 September.
The net NPA ratio rose to 5.4% indicating the company is not lucky in upgrades and recoveries too. In its interaction with analysts, Mahindra Finance said that credit costs would come down to 250-275 basis points for 2016-17 from around 300 basis points in the previous year as a bountiful monsoon translates into more cash with rural households and businesses. A basis point is 0.01%.
Another thorn in the firm’s book is high operating costs. A stockpile of Rs4,748 crore of gross bad loans would keep provisions elevated and operating expenses too will stay high as Mahindra Finance is unlikely to slow down its expansion plans.
The stock trades at a price to book value multiple of 3.4 of its FY16 earnings. Valuations appear expensive and brokerage Prabhudas Lilladher notes the same. The stock’s impressive run-up looks to cease until Mahindra Finance’s numbers start showing the rural recovery the company has been talking about.