The stock of Mahindra and Mahindra Financial Services fell 7 per cent on Monday, reacting to the disappointing December quarter results announced on January 17. Slowing loan growth and deterioration of asset quality — that has dragged the performance of the company over the last couple of quarters — continued to weigh on earnings during the December quarter.

In the latest December quarter, the company’s net profit declined by 17 per cent over last year and loan disbursements declined for the fourth quarter in a row by 8 per cent. Bad loans are now 7.1 per cent of total loans, the highest in the last four years. In fact, the last time bad loans were at this level was in 2007-08 when gross non-performing assets (GNPA) were 7.6 per cent of loans.

The loan growth for the company has notably slowed down in the last one year. In 2013-14, the company’s loan grew by 23 per cent, the pace slowed down to about 10 per cent in the latest December quarter. Sluggish UV and tractor sales and loss in market share in the car segment has been impacting the company’s loan growth.

Currently the share of the UV segment in the total assets financed is 30 per cent, tractors is 19 per cent, cars 23 per cent and CV/CE 13 per cent. The company had increased its exposure to the UV segment in 2012-13, when the CV cycle was down. But as the economy revives the company may not be able to ride the recovery, given its lower exposure to the CV segment.

The company’s asset quality has also deteriorated sharply over the past six quarters. The GNPA has risen to 7.1 per cent of loans as of December 2014, from 4.4 per cent as of March 2014. The provision cover is now down to 54 per cent, from a healthy 80-85 per cent, two years back.

The RBI’s recent tightening of the non-performing asset recognition norms for NBFCs will also impact the earnings of the company. Currently, loans where borrowers have defaulted on their payments for 180 days or more are classified as NPAs. Now, according to the new regulation, this has been brought down to 90 days. Mahindra and Mahindra Financial Services that caters to customers in the rural and semi-urban areas, having irregular cash flows, will face structural challenges when migrating to the new norms. The company currently follows a 150-day norm. The return on equity which was a healthy 22 per cent two years back, has slipped to 12.4 per cent in the December quarter. Slower loan growth and pressure on asset quality will continue to weigh on the company’s earnings.

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