Hold M&M Financial; target of Rs 890: Emkay

Emkay Global Financial Services has recommended hold rating on Mahindra & Mahindra Financial Services (MMFS) with a target of Rs 890 in its September 21, 2012 research report. According to the research firm, decline in the borrowing cost will further help the company in improving its NIMs.

“MMFS approved to sell 12.37% of its stake in its insurance arm MIBL to Inclusion Resources Private Limited (IRPL), a subsidiary Company of Leapfrog Financial Inclusion Fund for Rs643.3mn. The deal values the insurance subsidiary at a whopping Rs52bn as against the initial investment of just Rs5mn done in FY04. Leapfrog will further infuse 2.7% equity into the insurance arm which will take its total holding to 15%. The MIBL PAT stood at Rs135mn in FY12, contributed 2% in the consolidate earnings with net premium collection of Rs4.1bn. Even as the stake is values at whopping Rs43/share, we find it difficult to plug in the same number in our valuations as it discounts MIBL’s FY12A earnings by staggeringly high 52x and Q1FY13 annualised earnings by 20x. While, IRPL would have had its own long-term strategic plans for entering financial inclusion space in India, it will very difficult for financial investors to pay same kind of entry premium to the company especially when MMFS may not necessarily unlock 100% value in the venture in medium term future.”

“MMFS’ NIMs came under pressure in FY12 declining from 9.8% in FY11 to 8.7% in FY12 led by rise in its cost of borrowings and lower yields on securitization portfolio. However we expect the margins to improve in FY13/14 to 9.1%/9.4% aided by lower borrowing cost. The company borrow 48% of its funds from banks (excluding assignments) and another ~9% through commercial papers, which will accrue lower cost as the bank base rate/ commercial paper rates has come down by 50/100bps respectively over the last 6 months. However, 40% of the bank borrowings (20% of total) are fixed priced loans which over period of next two years will get repriced upwards. However, the same will be more than offset by higher proportion of incremental assets which would have come at higher yields too. MMFS has revised its lending rates by 100/200bps between last 12/18 months.”

“We view the above mentioned stake stale in the insurance arm as positive for the company as 1) the same has been done at attractive valuations and 2) will provide the insurance arm with the necessary funds to grow. Moreover decline in the borrowing cost will further help the company in improving its NIMs. Hence we are revising our NII estimates upwards by 5% each and earnings estimates by 13%/7% for FY13/14 respectively. Resultantly, we are revising our target price to Rs890. However, with recent run up in the stock we change our rating to hold,” says Emkay Global Financial Services research report.

Institutional holding more than 40% in Indian cos

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