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Hold rating on Mahindra Fin, target Rs 255

We reiterate our ‘hold’ rating on Mahindra Finance (MMFS) with a target price of Rs 255 per share. We value the core lending operations

Hold rating on Mahindra Fin, target Rs 255

We reiterate our ‘hold’ rating on Mahindra Finance (MMFS) with a target price of Rs 255 per share. We value the core lending operations on a two-stage residual income model, for which we assume an income CAGR of 15%, a dividend payout ratio of 30%, a cost of equity of 15.2% (Deutsche Bank estimate), and a terminal growth rate of 5% (the nominal growth rate for developed countries). We remove investments in insurance broking and rural housing (which we value separately) from net worth when valuing the core lending operations. We value the business on a P/E basis and the rural housing business on P/B. The stock trades at 2.3x FY16E P/B with FY16E RoE of 19% and appears fairly valued.

Mahindra Finance Q2FY15 net profit (-6% y-o-y, +34% q-o-q) was in line with consensus and ~7% ahead of our estimate. PPOP was in line with our estimate; the beat on PAT was on account of lower NPL provisions (provision coverage is down q-o-q by 150 basis points). Despite the q-o-q improvement, we believe the near-term business outlook remains challenging. Disbursements growth is likely to be modest, and the key focus area will be containing asset quality.

MMFS has indicated that there is no demand uptick for auto or tractor loans so far. There are still price discounts being offered on vehicles, and even the festive demand through Q2FY15 was not very exciting.

Deutsche

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First published on: 28-10-2014 at 02:03 IST
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