More cash in the hands of villagers sends relief signal for Mahindra Financial

More cash in the hands of rural Indians along with their willingness to spend spells good news for Mahindra & Mahindra Financial Services Ltd., a non-bank lender for purchasers of tractors and vehicles, by helping it rebound from shrinking profits and increasing bad loans.

“After two years of struggle, we’re seeing that rural sentiment has definitely turned positive and farm cash-flow has held up,” Ramesh Iyer, vice chairman and managing director, said in an interview in Mumbai. “On-time, widespread and more-than-average rainfall predicted this year will lead to rural consumers pulling out money and spending it,” he said.

Government policy, including buying farm products at higher-than-market prices along with a bigger budget aimed at boosting the rural economy, is already benefiting Mahindra Financial. The lender, which has a presence in about 330,00 villages, forecasts bad loans will continue to shrink as clients’ financial health strengthens. Signalling an improvement, the firm’s net income doubled for the 12 months through March after falling for three straight years.

Gross bad loans were reduced to 8.5% of the total as of March 31 from 9% a year earlier. The firm forecasts they’ll dip to 7% in the first half of this financial year and may fall to 5% later. “With signs of good rainfall and higher crop prices, things are going the right way for us and that will help reduce bad loans,” Iyer said.

Even as Mahindra Financial shares seem to have factored in the revival -- they have more than doubled since April 2016 -- many analysts tracking the company see further gains, with a consensus price target 13% higher than the last closing price. Twenty-four of the 31 analyst estimates compiled by Bloomberg are higher than the current share value.

With growth improving, current valuations at 2.1 times the estimated book price for the fiscal year through March 2020 “look undemanding,” Nomura Financial Advisory & Securities (India) Pvt said in an investor note June 6. Nomura recommends buying the shares with a price target of 600 rupees. The stock closed on Tuesday at Rs 491 .

Not all analysts are as ebullient about the firm’s outlook, seeing risk in its reliance on the health of farmers’ incomes. “We prefer non-bank financiers that are less dependent on rural consumers as it shields them from the vagaries of the village economy,” said Digant Haria, an analyst at Antique Stock Broking Ltd. in Mumbai, who rates the shares as hold with a target of Rs 554.

As bad debt shrinks, Mahindra Financial aims to achieve a 3% return on assets within about 18 months, up from 1.9% as of March 31; it expects the value of financed assets to jump at least 15% this year. About 45% of the assets are manufactured by its parent Mahindra & Mahindra Ltd., the nation’s biggest tractor maker. The firm’s net interest income jumped 25% last year while provisions and write-offs for bad loans fell 6% from a year earlier.