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Buy Mahindra & Mahindra Financial Services, target Rs 500: ICICI Direct

Buy Mahindra & Mahindra Financial Services at a price target of Rs 500.|
Updated: Mar 15, 2019, 01.03 PM IST
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The current market price of Mahindra & Mahindra Financial Services is Rs 430.30.
ICICI Direct has a buy call on Mahindra & Mahindra Financial Services with a target price of Rs 500.

The current market price of Mahindra & Mahindra Financial Services is Rs 430.30.

Time period given by the brokerage is one year when Mahindra & Mahindra Financial Services price can reach the defined target.

Investment rationale by the brokerage:
Rural dominance & normal monsoons – An ideal blend: Mahindra and Mahindra Financial Services (MMFS) is a subsidiary of Mahindra & Mahindra group, one of the largest business conglomerates in the country. MMFS is predominantly into rural, semi-urban vehicle financing with advances at nearly Rs 58,240 crore as on December 31, 2018, and wide customer base of 5.3 million. It is headed by Ramesh Iyer (MD, Vice Chairman), who has decades of experience in the Indian financial sector. MMFS operates 1313 branches in 27 states servicing nearly 5.3 million customers.

Strong business momentum led by rural cash flow, high NIM: For MMFS, AUM has grown at 23 per cent CAGR with volatile spells in FY09-18. AUM grew at 32 per cent CAGR in 09-14, slowed down in FY15-17 to 10 per cent and then revived to 16 per cent in FY16-18 to Rs 55,100 crore. We expect AUM to grow at 20 per cent CAGR in FY19-21E to Rs 94,996 crore. Robust infrastructure spends and recent farmer friendly schemes are expected to support rural cash flows. Current NIM at nearly 8 per cent is expected to remain stable over the next two years as it has already moderated from highs of 9.2 per cent in the past.

Operating leverage to kick in; productivity to improve ahead: As loan book growth picks up, we expect MMFS to benefit from expenses incurred on employee and branch expansion. Opex/AUM ratio is seen moderating by nearly 10 bps to 2.9 per cent in FY21E. Likewise, CI ratio is expected to reduce from 39.7 per cent in FY18 to 36.5 per cent in FY21E.

RoA improvement led by steady asset quality, productivity: Post-impact of a bad monsoon, RoA revived from 1 per cent in FY17 to 1.9 per cent in FY18 and further to 2.3 per cent in 9MFY19. Likewise, RoE improved from 6.4 per cent in FY17 to 11.3 per cent in FY18, on the back of strong NII growth at 16 per cent YoY and reduction in CI ratio from nearly 42 per cent to nearly 39 per cent in FY18. With steady credit cost and stable yields, we expect RoA to improve further to 2.4 per cent in FY21E.

Buoyancy in rural India to benefit; valuation to sustain, BUY: Buoyancy in rural India and MMFS’ focus on rural financing are expected to support valuations. MMFS has ingredients to sustainably command premium valuation - 1) rural reach providing huge opportunity with pricing power, 2) robust AUM growth (AUM, earnings CAGR of 20 per cent, 25 per cent, respectively, in FY18-21E), 3) higher rural income led by farm loan waivers and cash flow receipt during election, 4) strong management and 5) adequate risk management with limited losses. We value core auto business at 2.6x FY21E ABV (1.8x FY21E BV) and add Rs 50 as value for subsidiaries like housing that is picking up the pace. Assuming a 20 per cent holding company discount in lieu of subsidiaries, we initiate coverage with 'BUY' recommendation and a target price of Rs 500 per share.

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Disclaimer: This recommendation is analyst's own and does not represent those of & Please consult your financial advisor before taking any position in the stock/s mentioned.

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