>MAHINDRA & MAHINDRA FINANCIAL SERVICES LIMITED (HDFC SECURITIES)

Company Background
Mahindra & Mahindra Financial Services Limited (MMFSL), a 60% subsidiary of Mahindra & Mahindra Limited was incorporated on 1st January 1991 as Maxi Motors Financial Services Limited. One of India's leading non-banking finance companies, focused on the rural and semi-urban sector, the company provides finance for Utility Vehicles (UV), tractors and cars and has the largest network of branches (80% of the districts in India) covering these areas. MMFSL’s product portfolio includes right from finance for two wheelers, tractors, farm equipment, cars and utility vehicles to commercial vehicles and construction equipment. It currently finances 30% of M&M’s sales, which amounts to about 70% of its disbursements.

Indian economy has moved decisively to a higher growth phase. Macroeconomic fundamentals continue to inspire confidence and the investment climate is full of optimism. While agricultural growth will continue to be the major factor that will drive sales, haulage applications are expected to increasingly support the economics of tractors.

MMFSL has 2 wholly owned subsidiaries – Mahindra Insurance Broking Ltd and Mahindra Rural Housing Finance Ltd. It recently started (Feb 2009) to accept fixed deposit from public for the first time in the history of their operations.

Triggers

Lending in Rural and Semi Urban areas - a priority
The fact that lending in the rural and semi urban areas is considered, as a priority by the Reserve Bank of India (RBI) is best exploited by companies like MMFSL. In fact, being the largest tractor financing company in the country, it is able to position itself favorably for the government subsidies on agriculture and farm equipments. Hence, if one is to believe in the story of rural India leading the economy’s growth trajectory in the future, MMFSL could be one of the companies to look out for. Due to the priority sector status accorded to rural / farm lending, MMFSL is able to garner approximately 3% discount on its borrowing cost for tractor lending and 1% discount for funding utility vehicles. MMFSL is one of the early entrants into the rural and semiurban markets, initially providing financing solely for products of Mahindra & Mahindra Limited (M&M), which has been selling its products in those markets for over 60 years. There is a huge opportunity in these markets and MMFSL is well positioned to
service this population. The organized sector of financial services market in rural and semi-urban areas is likely to continue to experience growth. The key dimensions of its strategy are innovative products, risk adjusted pricing, customer focus, customer convenience, wide distribution, strong processes and prudent risk management.

Perfect Player for the rural and semi urban markets
Credit in rural markets was principally provided by banks from the organized finance sector or by the local moneylenders. There was a large section of the rural population which did not have access to credit largely due to their inability to meet the lending covenants of the banks or because they could not service the high rates of the money lenders. While interest rates charged by PSU banks are in high single digits, their credit appraisal systems are perceived to be rigid and involve considerable paperwork. Further, borrowing from local moneylenders does not involve any paperwork but the interest rates charged by them is in excess of 30% p.a. MMFSL identified this opportunity and positioned itself to service this population. MMFSL adopted simple and prompt loan approval and documentation procedures and offered rates between those charged by the banks and the moneylenders. It had always acted as the ideal option between the organized banking sector and the moneylenders, providing its customers with a mix of personalized, flexible and efficient lending services with customized packages for customers’ every need. MMFSL designs the loan products (both in terms of amount and tenure) based on usage and the economic life of the vehicle. Even the repayments are structured to match the anticipated cash flow to be generated by the borrower, for example monthly or quarterly repayments in case of UVs and semi annual repayments in the case of tractors – matching with the inflows of the borrowers. Sale of UVs depends a lot on the infrastructure activity. Given the expected thrust of the new Govt on Infrastructure, UV sales could do well going forward.

Diversification of products to act as a bridge to greater market penetration
The business model of MMFSL is such that a majority of its loan book comprises of clients from rural and semi urban areas. The fact is that the rural and semi urban population prefers a single unit from where they can get access to all financial services. They should be able to save small amounts, make withdrawals, take loans, remit, buy a mutual fund, buy insurance, pay premiums, lodge claims, and get compensation. All these transactions should be possible from one physical outlet. Considering this factor, MMFSL has diversified its business in such a way that the above-mentioned facilities are provided by them to the rural and semi urban population. This comes as a handy tool for the company to penetrate further into the financial products distribution market of the country especially in the rural and semi urban areas. Currently MMFSL has an extensive distribution network with presence in 25 states and 2 union territories in India through 436 branches.

To see full report: MMFSL