Nov. 7, 2009 (The Hindu Business Line) --

is leveraging the under-penetrated rural financing segment.

M. V. S. Santosh Kumar

At the current market price of Rs 253.5, the stock trades at a modest 9.4 times its estimated FY-10 earnings and 1.82 times its adjusted book value as of September 30, 2009. In addition to modest valuations and earnings growth potential, high levels of capital adequacy, diversified presence in the auto segment, significant branch network with presence predominantly in the rural and semi-urban areas place the company in good stead. Strong sales in the auto segment and M&M’s extensive rural reach have contributed to the loan book growth for M&M Finance. Easing liquidity (enabling lower borrowing costs) and improvement in average collections led to strong earnings growth.

The company may continue this momentum as the automobile sector continues to grow at a strong pace, after being one of the earliest sectors to chart a recovery. The company’s gross non-performing assets stood at 9 per cent as of September. While stretched repayment cycles may lead to a higher NPA number, this may not always entail a higher default rate. High levels of NPA provision coverage and high levels of capital adequacy (17 per cent) also shield the company, to some extent, from any systemic adversities.
Business and Financials

The company’s advances book is well-diversified, comprising lending to buyers of utility vehicles (35 per cent of the portfolio), tractors (23 per cent), passenger cars (28 per cent), commercial vehicles (9 per cent) and pre-owned vehicles (5 per cent). Disbursements are increasing from the other segments while the tractor segment has seen a steady decline. However, the acquisition of Punjab Tractors by M&M may help M&M Finance increase disbursements to the tractor segment.

While captive lending may allow for an assured customer base, the company may face competition from other asset-financing peers as it tries to diversify especially into cars and commercial vehicles. Tractors, utility vehicles and refinance division are somewhat shielded from this threat with fewer organised players in this segment. To diversify its revenue mix and leverage on its branch network, the company has started an insurance broking and rural housing finance subsidiary. These subsidiaries have begun contributing in a small way to the company’s bottomline. With significant presence in the rural areas, M&M Finance may be able to pose stiff competition to housing financing companies and banks.

While the company’s borrowing profile of the company is quite diversified, it has increased its dependence on bank loans in the last few quarters due to unavailability of other avenues of financing.