Mahindra&MahindraFinancialServices

MMFSs Q2FY15 performance was slightly below our expectation as credit costs
remain elevated (200bps) and slower NII growth resulting in some pressure in
spreads. Asset quality was largely stable with no new customer additions while
collection efforts remained concerted on gradual movement in economic activity.
AUMgrowthhascertainlypickeduponhigherdisbursementsbutcleartrendsare
not visible asenvironmentremains volatile. We retain Reduce rating with TP of
Rs255asbelieverecoverywillbehardandgradualforanypickupinreturnratios.

October22,2014
PriteshBumb
priteshbumb@plindia.com
+912266322232

Rating
Price
TargetPrice
ImpliedUpside
Sensex
Nifty

Disbursementpickupinallsegments,butstilltofollowinAUM:Disbursements
wereflatYoYbuthascomeofffromnegativeterritory.Pickupindisbursements
wereledfromAuto,CV&usedvehiclesegment,butpickuphasnotfollowedin
AUM as (1) Most of the growth was in end of the quarter (2) Only certain
geographieshaveshowedimprovedactivityand(3)Discountsstillremainhigh
whichreflectinAUMdespitepickupinvolumes.Managementcommentarywas
optimisticbutstillarenotclearifgrowthtrendsweretosustain,butstillhopeto
dowellasitpenetratesdeeperintoruralwithdiverseproducts.

Asset quality largely stable withsomemovement inbuckets: Asset quality

was stable with no large slippages in terms of fresh customers but saw some
movement in NPA buckets where loan dues have fallen beyond +200days as
some lag between repossession and sale of vehicle. This also kept credit cost
highat~200bps.Monsoonrelativelyhasbeengoodandsoutherngeographies
have started regaining economic activity which will help collection efforts and
cause lower delinquency. Management also indicated lost collections from
Q1FY15 would remain staggered over next few quarters as economic activity
picksupgenerallyinH2oftheFY.

Improving prospects will be gradual on return ratios: Management clearly

indicatedthatgrowthwillbehighlyeffortbasedandwillbeslowandgradual.
Also,collectioneffortsbeinginfullforcehavebeensluggish.ThoughMMFShas
gearedupforopportunities,increasedcompetition,lowerreturntoriskprofile
andvolatileenvironmentwillkeepreturnrationbelownormalisedlevels.

Reduce
Rs277
Rs255
7.9%
26,787
7,996

(PricesasonOctober22,2014)
Tradingdata
MarketCap.(Rsbn)
Shareso/s(m)
3MAvg.Dailyvalue(Rsm)
Majorshareholders
Promoters
Foreign
DomesticInst.
Public&Other
StockPerformance
(%)
1M
6M
Absolute
(1.5)
13.0
Relative
0.0
(4.7)
HowwedifferfromConsensus
EPS(Rs)
PL
Cons.
2015
16.0
16.7
2016
19.6
20.9

156.0
563.5
916.4
52.06%
41.52%
1.09%
5.33%
12M
2.6
(25.8)
%Diff.
4.6
5.9

PricePerformance(RIC:MMFS.BO,BB:MMFSIN)
(Rs)
350
300
250
200
150
100
50
0

KeyFinancials(Y/eMarch)

Netinterestincome(Rsm)

Growth(%)
Noninterestincome(Rsm)
OperatingProfit(Rsm)
PAT(Rsm)
EPS(Rs)
Growth(%)
NetDPS(Rs)

2013
20,234
30.1
380
15,340
8,541
15.2
25.6
3.6

2014
25,014
23.6
314
18,516
8,872
15.7
3.8
3.8

2015E
28,605
14.4
361
20,590
8,995
16.0
1.4
3.6

2016E
34,229
19.7
415
24,742
11,061
19.6
23.0
4.4

2013
10.1
23.1
4.2
18.2
3.5
3.7
1.3

2014
9.5
18.6
3.4
17.6
3.1
3.5
1.4

2015E
9.2
16.6
2.9
17.3
2.7
3.2
1.3

2016E
9.4
17.9
3.0
14.1
2.4
2.8
1.6

Oct14

Aug14

Jun14

Apr14

Feb14

Dec13

Oct13

Source:Bloomberg

Profitability&valuation
Spreads/Margins(%)
RoAE(%)
RoAA(%)
P/E(x)
P/BV(x)
P/ABV(x)
Netdividendyield(%)
Source:CompanyData;PLResearch

PrabhudasLilladherPvt.Ltd.and/oritsassociates(the'Firm')doesand/orseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresultinvestorsshouldbeawarethat
theFirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthereport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.

Pleaserefertoimportantdisclosuresanddisclaimersattheendofthereport

Q2FY15ResultUpdate

Sanityinperformancebutenvironmentremainsvolatile

 Mahindra&MahindraFinancialServices

Exhibit1: MMFSQ2FY15:Steadyquarter
(Rsm)

Q2FY14

Q1FY15

Q2FY15

YoY

QoQ

IncomefromOperations

12,031

12,752

13,537

12.5%

6.2%

InterestIncome

12,031

12,752

13,537

12.5%

6.2%

InterestExpenses

5,253

5,949

6,168

17.4%

3.7%

NetInterestIncome

6,779

6,803

7,369

8.7%

8.3%

OtherIncome

96

79

150

56.8%

91.0%

TotalIncome

6,875

6,881

7,519

9.4%

9.3%

TotalOperatingExpenses

2,249

2,269

2,521

12.1%

11.1%

OperatingProfit(PPP)

4,625

4,612

4,998

8.1%

8.4%

Provisions&WriteOffs

1,262

2,250

1,842

45.9%

18.1%

PBT

3,363

2,362

3,156

6.2%

33.6%

ReportedProfit

2,212

1,554

2,069

6.5%

33.2%

311,465

342,710

356,942

14.6%

4.2%

OffBalanceSheetAUM

16,794

20,092

9,287

155.3%

146.2%

NIM

8.94%

7.96%

8.43%

0.51%

0.47%

297,655

325,066

340,033

14.2%

4.6%

Auto/Utilityvehicles

80,367

97,520

98,040

22.0%

0.5%

Tractors

56,554

61,763

60,852

7.6%

1.5%

Cars/Others

71,437

74,765

77,756

8.8%

4.0%

CommercialVehicles

47,625

45,509

47,330

0.6%

4.0%

Usedvehicles&Others

41,672

45,509

54,091

29.8%

18.9%

AssetsUnderManagement

AUM(Rsm)

AssetQuality
GrossNPAs

12,223

20,278

21,314

74.4%

5.1%

NetNPAs

5,541

9,324

10,126

82.7%

8.6%

GrossNPA(%)

4.25%

6.42%

5.91%

1.7%

0.5%

NetNPA(%)

1.97%

3.06%

2.90%

0.9%

0.2%

Coverage(%)

53.6%

52.4%

51.0%

2.6%

1.4%

CreditcostsCalculated

1.62%

2.63%

2.07%

0.45%

0.56%

TotalBorrowedFunds

222,755

243,388

286,957

28.8%

17.9%

Loans&Advances&others

280,861

304,974

349,320

24.4%

14.5%

TotalAssets

294,671

322,618

366,229

24.3%

13.5%

InsuranceBrokersPAT

89

85

90

1.1%

5.9%

RuralHousingPAT

65

52

98

50.8%

88.5%

BalancesheetDetails

SubsidiaryPerformance

Source:CompanyData,PLResearch

October22,2014

 Mahindra&MahindraFinancialServices

Q2FY15ConcallHighlights:
Outlook&commentary:

Stoppage of discount which is 1012% of vehicle would alone increase AUM

growthof57%

Pickup in growth still not started on ground, some geographies have been
gettingintoproblems

UsedvehiclesdisbursementsarepickingupgraduallyforMMFSL

Have tied up with large manufacturers for whole India financing, which is
alreadyhappeninginvolumes

TractorsgrowthbetterinH2ofeveryyearasutilizationinH1islow.

IfunderlyinggrowthcontinuesandstablemarketshareMMFSLwillstillgrowat
decentrates.

Balancesheet:

Rs20bno/ssecuritizedbook.

LTVsat7072%andCV/CELTVs(includingprojectcost)at6065%

Collections:

Stilllargelyemployeesbeingdeployedforcollectionsefforts.

Collectionsarestillslowaslotofcustomersaredaytodayearnerswhichhave
gradualpaymentpattern

Assetquality:

No additions to fresh slippages from customers. Some bucket movement has

been there which increased provisions. Also, have done provisions on
repossessedvehicleswheresalelosswouldhaveoccurred.

NPArecognitionnormsof90daysor120daysfrom180dayscurrentlywillbenot
aproblemasregulatorwillgivesometimeforimplementingnewnormwitha
timeline. Will enhance collection effort and repossession if norms change or
startacceleratingprovisionsonlatestbookofNPA.

Bad debt writtenoff Rs720mn v/s Rs520mn in Q2FY14 and Loss from
repossessedsalewrittenoffatRs920mnv/sRs520mn

October22,2014

 Mahindra&MahindraFinancialServices

Exhibit2: AUM growth seems to be now flattening and should Exhibit3: Disbursement growth picked up mostly in end of the
pickupasdisbursementweregoodinQ2FY5
quarter
50.0%

50.0%

40.0%

40.0%

30.0%

30.0%

20.0%

20.0%

10.0%
0.0%

10.0%

10.0%

0.0%

Source:CompanyData,PLResearch

Q2FY15

Q1FY15

Q4FY14

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

Q2FY12

Q1FY12

Q4FY11

Q2FY15

Q1FY15

Q4FY14

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

Q2FY12

Q1FY12

Q4FY11

20.0%

Source:CompanyData,PLResearch
Exhibit4: Marginstoremainvolatileforsometimeaheadasmixgetsadjusted
12.00%
11.00%
10.00%
9.00%
8.00%
7.00%

Q2FY15

Q1FY15

Q4FY14

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

Q2FY12

Q1FY12

Q4FY11

6.00%

Source:CompanyData,PLResearch
Exhibit5: Opex/assetshasmovedupasMMFSgearsupforimprovinglendingprospects
5.0%

Op.Cost/Assets(%)

4.5%
4.0%
3.5%
3.0%
2.5%

Q2FY15

Q1FY15

Q4FY14

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

Q2FY12

Q1FY12

Q4FY11

2.0%

Source:CompanyData,PLResearch

October22,2014

 Mahindra&MahindraFinancialServices

Exhibit6: Assetqualitydoesnotseeanylargeslippages
GrossNPA(%)

7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%

Exhibit7: CreditcostonAUMcomeoffonlargelystableassetquality
3.00%

NetNPA(%)

Creditcosts PL(AUM)

2.50%
2.00%
1.50%
1.00%
0.50%

Source:CompanyData,PLResearch

Q2FY15

Q1FY15

Q4FY14

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

Q2FY12

Q1FY12

Q4FY11

Q2FY15

Q1FY15

Q4FY14

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

Q2FY12

Q1FY12

Q4FY11

0.00%

Source:CompanyData,PLResearch
Exhibit8: Quarterly change in GNPAs YoY GNPAs growth has been sharp in past few
quarters

GNPA QoQchange

100%
80%
60%
40%
20%
0%

Q2FY15

Q1FY15

Q4FY14

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

Q2FY12

Q1FY12

Q4FY11

20%

Source:CompanyData,PLResearch

Exhibit9: ROEstomoveto20%onstabilityinassetqualityandmargins
ROEDecomposition(onAUM)
NetInterestIncome/Assets

FY11

FY12

FY13

FY14 FY15E

FY16E

FY17E

10.14%

9.20%

9.22% 8.81% 8.50%

8.72%

8.58%

Fees/Assets

0.30%

0.15%

0.16% 0.10% 0.10%

0.10%

0.09%

Investmentprofits/Assets

0.00%

0.00%

0.00% 0.00% 0.00%

0.00%

0.00%

Netrevenues/Assets

10.44%

9.35%

9.37% 8.91% 8.60%

8.82%

8.67%

OperatingExpense/Assets

3.78%

3.31%

3.06% 2.94% 2.95%

3.00%

3.00%

Provisions/Assets

1.23%

0.88%

1.17% 1.63% 1.95%

1.99%

1.70%

Taxes/Assets

1.85%

1.70%

1.63% 1.48% 1.18%

1.23%

1.27%

TotalCosts/Assets

6.86%

5.89%

5.86% 6.05% 6.09%

6.22%

5.97%

ROA

3.57%

3.46%

3.52% 2.86% 2.51%

2.60%

2.70%

Equity/Assets

19.2%

16.5%

18.3% 16.4% 15.8%

15.5%

14.7%

ROE

22.0%

22.8%

23.1% 18.6% 16.9%

18.0%

19.7%

Source:CompanyData,PLResearch

October22,2014

 Mahindra&MahindraFinancialServices

Exhibit10: WeretainReducewithSep16PTatRs255pershare
Riskfreerate

8.0%

EquityRiskPremium

6.0%

Beta

1.10

CostofEquity

14.6%

Terminalgrowth

5.0%

NormalisedROE

19.4%

Stage2growth

18.0%

Sep15PT

255

Subsidiaryvaluation

23

ImpliedSep16P/BLendingBiz

2.33

ImpliedSep16P/ELendingBiz

11.8

Source:CompanyData,PLResearch,Bloomberg

October22,2014

 Mahindra&MahindraFinancialServices

IncomeStatement(Rsm)
Y/eMarch
Int.Inc./Opt.Inc.
InterestExpenses
Netinterestincome
Growth(%)
Noninterestincome
Growth(%)
Netoperatingincome
Expenditure
Employees
Otherexpenses
Depreciation
Totalexpenditure
PPP
Growth(%)
Provision
Otherincome
ExchangeGain/(Loss)
Profitbeforetax
Tax
Effectivetaxrate(%)
PAT
Growth(%)

2013

2014

36,422
16,188
20,234
30.1
380
41.2
22,759

3,616
511
222
4,350
15,340
41.7
2,833

12,506
3,965
31.7
8,541
37.7

46,894
21,880
25,014
23.6
314
(17.4)
27,650

4,729
511
243
5,483
18,516
20.7
5,058

13,458
4,586
34.1
8,872
3.9

2015E

53,850
25,244
28,605
14.4
361
15.0
31,379
5,674
511
245
6,430
20,590
11.2
7,363

13,227
4,233
32.0
8,995
1.4

2016E
62,848
28,620
34,229
19.7
415
15.0
37,538
6,809
511
143
7,463
24,742
20.2
8,476

16,266
5,205
32.0
11,061
23.0

BalanceSheet(Rsm)
Y/eMarch

2013

2014

Sourcesoffunds

Equity
1,126
Reserves&Surplus
43,420
Networth
44,546
Growth(%)
51.0
Loanfunds
188,723
Growth(%)

Others

MinorityInterest

DeferredTaxLiability

Total
233,269
Applicationoffunds

Netfixedassets
1,068
Advances
240,384
Growth(%)
37.4
Netcurrentassets
(13,792)
Investments
5,610
Growth(%)
11.6
OtherAssets

Total
233,269
Source:CompanyData,PLResearch.

1,127
49,815
50,942
14.4
242,977
28.7

293,919

1,195
296,170
23.2
(12,138)
8,692
54.9

293,919

2015E

2016E

1,127
56,446
57,573
13.0
272,213
12.0

329,787

1,127
64,601
65,728
14.2
330,305
21.3

396,033

1,426
333,650
12.7
(13,630)
8,341
(4.0)

329,786

1,853
399,275
19.7
(15,146)
9,982
19.7

395,964

QuarterlyFinancials(Rsm)
Y/eMarch
Q3FY14

Q4FY14

Q1FY15

Q2FY15

12,658

5,891
6,767
20.6
53
6,820
20.4
2,528
4,292
13.2
1,796

2,496
854

34.2
1,641
(18.0)

13,602

5,975
7,627
15.0
104
7,732
14.0
2,293
5,439
16.4
748

4,691
1,584

33.8
3,107
(6.9)

12,752

5,949
6,803
10.4
79
6,881
10.6
2,269
4,612
10.9
2,250

2,362
809

34.2
1,554
(18.7)

13,537

6,168
7,369
8.7
150
7,519
9.4
2,521
4,998
8.1
1,842

3,156
1,087

34.4
2,069
(6.5)

2013

2014

2015E

2016E

277
563
155,872
66.8
15.2
79.1
74.5
18.2
3.5
3.7
3.6
1.3

277
564
156,005
53.1
15.7
90.4
80.2
17.6
3.1
3.5
3.8
1.4

277
564
156,005
47.3
16.0
102.2
87.2
17.3
2.7
3.2
3.6
1.3

277
564
156,005
39.4
19.6
116.6
99.5
14.1
2.4
2.8
4.4
1.6

Int.Inc./OperatingInc.
Incomefromsecuritization
InterestExpenses
NetInterestIncome
Growth
Noninterestincome
Netoperatingincome
Growth
Operatingexpenditure
PPP
Growth
Provision
ExchangeGain/(Loss)
Profitbeforetax
Tax
Prov.fordeferredtaxliability
Effectivetaxrate(%)
PAT
Growth

KeyRatios
Y/eMarch
CMP(Rs)
Eq.Shrs.O/s.(m)
MarketCap(Rsm)
MarketCaptoAUM(%)
EPS(Rs)
BookValue(Rs)
AdjustedBookValue(Rs)
P/E(x)
P/BV(x)
P/ABV(x)
DPS(Rs)
DividendYield(%)

AssetQuality
Y/eMarch

2013

2014

2015E

2016E

GrossNPAs(Rsm)
NetNPAs(Rsm)
GrossNPAstoGrossAdv.(%)
NetNPAstoNetAdv.(%)
NPACoverage(%)

7,630
2,600
3.2
1.1
65.9

14,057
5,756
4.7
1.9
59.1

18,806
8,463
5.6
2.5
55.0

24,156
9,662
6.0
2.4
60.0

Profitability(%)
Y/eMarch

2013

2014

2015E

2016E

NIM
10.1
RoAA
4.2
RoAE
23.1
Source:CompanyData,PLResearch.

9.5
3.4
18.6

9.2
2.9
16.6

9.4
3.0
17.9

October22,2014

 Mahindra&MahindraFinancialServices

PrabhudasLilladherPvt.Ltd.
3rdFloor,SadhanaHouse,570,P.B.Marg,Worli,Mumbai400018,India
Tel:(9122)66322222Fax:(9122)66322209
RatingDistributionofResearchCoverage

%ofTotalCoverage

60%

51.9%

50%
40%

31.7%

30%
16.3%

20%
10%

0.0%
0%
BUY

Accumulate

Reduce

Sell

PLsRecommendationNomenclature

BUY

Over15%OutperformancetoSensexover12months

Accumulate

: OutperformancetoSensexover12months

Reduce

UnderperformancetoSensexover12months

Sell

: Over15%underperformancetoSensexover12months

TradingBuy

Over10%absoluteupsidein1month

TradingSell

: Over10%absolutedeclinein1month

NotRated(NR)

Nospecificcallonthestock

UnderReview(UR)

: Ratinglikelytochangeshortly

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as
informationandisnotforcirculation.ThisdocumentisnottobereportedorcopiedormadeavailabletootherswithoutpriorpermissionofPL.Itshouldnotbe
consideredortakenasanoffertosellorasolicitationtobuyorsellanysecurity.
Theinformationcontainedinthisreporthasbeenobtainedfromsourcesthatareconsideredtobereliable.However,PLhasnotindependentlyverifiedtheaccuracy
orcompletenessofthesame.NeitherPLnoranyofitsaffiliates,itsdirectorsoritsemployeesacceptanyresponsibilityofwhatsoevernaturefortheinformation,
statementsandopiniongiven,madeavailableorexpressedhereinorforanyomissiontherein.
Recipientsofthisreportshouldbeawarethatpastperformanceisnotnecessarilyaguidetofutureperformanceandvalueofinvestmentscangodownaswell.The
suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an
independentexpert/advisor.
EitherPLoritsaffiliatesoritsdirectorsoritsemployeesoritsrepresentativesoritsclientsortheirrelativesmayhaveposition(s),makemarket,actasprincipalor
engageintransactionsofsecuritiesofcompaniesreferredtointhisreportandtheymayhaveusedtheresearchmaterialpriortopublication.
Wemayfromtimetotimesolicitorperforminvestmentbankingorotherservicesforanycompanymentionedinthisdocument.

October22,2014