Hold Mahindra & Mahindra Financial; target Rs 216: Emkay
Emkay Global Financial Services has recommended hold rating on Mahindra & Mahindra Financial Services (MMFS) with a target price of Rs 216, in its June 24, 2013 research report.
June 25, 2013 / 14:45 IST
Emkay's report on Mahindra & Mahindra Financial Services (MMFS)
The MMFS management stated their intent of not applying for the banking License. The management is of the view that the new guidelines while provide for conversion of NBFC into banks, it does not provide any flexibility for coexistence of banks and NBFC. And therefore it believes that it will have adverse economic and operational impact on the large and profitable NBFC’s like them and hence will not apply for the banking license. However MMFS could consider its options again if RBI allows co-existence of NBFC and banks or give them larger time frame for conversion of NBFC into bank.As the guidelines do not allow coexistence of NBFC and Banks model, all the existing NBFC branches which meet the eligibility criteria will need to be converted into banks while rest will need RBI permission. MMFS has about 400 branches in Tier II- Tier VI cities which qualify for conversion into banks. Moreover of the total branches currently only 15 branches are in unbanked areas, as against the requirement of 25 percent of branch network which is about 175 branches. The management stated that while for an NBFC which has small branch network, conversion is not be a major issue but for a big NBFC like them with 2.5mn customer base in 670~ branches, it will be a herculean task involving conversion of all existing agreements. Moreover opening of 25 percent branch network in unbanked areas will have larger cost ramifications with very little benefits.Even If not converted into bank there are several sources through which MMFS could raise cost-efficient liabilities like Securitisation, ECB and Bonds. However once it grow bigger with balance sheet size of say more than Rs1tn, it would become increasingly difficult for MMFS and other NBFC’s of such size to raise proportionate quantum of funds."MMFS cites operational issues like conversion of NBFC branches into banks and opening of 25 percent branches in unbanked areas as major constraint in applying for license. EMI and lower yield business model are better placed with minimal operational challenges than fleet on street and high yielding model like MMFS. If would have converted into a bank, MMFS on a ~Rs316bn average book would have required ~100bn of SLR/ CRR, which would have 0.36 percent negative impact on FY14 RoA’s. While we continue to maintain positive outlook, given rich valuation at 2.7x/ 2.3x FY14/FY15 ABV, retain HOLD rating with PT of 216," says Emkay Global Financial Services research report.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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