Mahindra Finance 2020 Annual Report Takeaways!

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  • 25 years of experience working in semi-urban & rural financing. (68 lakhs customer base & 1322 business points, 3.83 lakh villages- basically present in 50% of all villages in India)
    • The Government’s commitment to improving rural income could lead to this part of the country to drive the economic recovery.
  • Gained market share in many product lines, however, in view of declining sales of vehicles and tractors, the disbursements have been lower. (Quality of underwriting?)
    • Vehicle & tractor: 7.57 lakh contracts financed, Loan book up by 6% YoY.
    • SME Loan book: Rs 2723 crs.
    • 22 lakh serviced insurance cases ( Life and Non-Life Retail business)
    • Housing finance Loan book: Rs 1876 crs (Majority of the loans disbursed were to customers in villages with an average annual household income of fewer than Rs.1.97 lakhs)
  • Core lending: Engaged in financing new and pre-owned auto and utility vehicles, tractors, cars and commercial vehicles.
    • Additional products: housing finance, personal loans, financing to small and medium enterprises, insurance broking and mutual fund distribution services.
  • Capital Adequacy ratio: 19.6%, tier1 at 15.4% (the recent rights issue is to boost this, which is quite low with respect to the sector in which they are lending)
  • Mahindra finance sold 49% of its AMC, Mahindra asset management company private, to the global financial services group, Manulife (Apr 2020)
    • At a valuation of 10-11% of AUM (30%+ as a % of equity): reasonable.
  • If you are financing a cyclical product, the profitability metrics are going to be cyclic until and unless there is strict underwriting quality, not the case here.
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  • Well managed Asset Liability Position:
  • No letter to shareholders discussing his thoughts by MD, Mr Ramesh Iyer.
    • Disappointed as the top banker’s viewpoints are the most important in any lending institution.
  • 21000+ employees of which ~3800 were added in FY20.
    • For employees other than Managerial Personnel who were in employment for the whole of the Financial Year 2018-19 and Financial Year 2019-20, the average salary increase is 20.24%.
  • Promoter Shareholding: 51.19%, 8 of the top 14 institutional investors increased stake.
    • Mr Ramesh Iyer, Vice Chairman & MD holds 0.13% of the co.
  • Initiatives launched by the RBI to support NBFCs & their impact:
  • COVID effect on the NBFCs:
    • Uncertainty on the potential credit loss in portfolios will result in lower securitisation deals thus impacting the fund-raising ability of NBFCs.
    • There is an enormous risk of defaults and insolvencies unless the regulatory framework is modified urgently to address the unprecedented challenge. (cost of funds could shoot up)
    • Auto and auto-ancillary, aviation, travel and hospitality, retail and consumer durables, real estate and construction are likely to be stressed.
  • If you think all banks will gain with the demise of NBFCs in this crisis, Think again.
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  • Moratoriums are not provided to most NBFCs by banks.
    •  NBFCs have provided moratorium to almost 50-90% of their book. The situation could go from illiquid to insolvency for most.
  • This is the % of NPA in Mahindra finance before the COVID hit:
  • Very high Loan to value in Mahindra Finance results in scary loan losses as even the collateral (vehicles) is depreciating. 
    • Although, The value of the collateral for Retail loans is derived by writing down the asset cost at origination by 20% p.a on reducing balance basis. In a recession, the value of second-hand vehicles could slump.
  • Subsidiaries contribution to assets & profit/loss: 
    • Note: Asset management company is making losses.

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JST Investments is a Mumbai-based investment firm that believes in long-term wealth creation. It's a brainchild of Aditya Kondawar, Aditya Shah, and Anish Moonka.
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