Riding the rural wave
* Mahindra Finance (MMFS) showcased robust performance, with PAT growth of 389% yoy to Rs3.8bn, driven by healthy AUM growth of ~26% yoy leading to robust growth in NII of ~28% yoy.
* AUM growth was driven equally by new lending segments (used vehicle/CVs) and traditional products (autos/tractors). Being the market leader, MMFS commands some pricing power; however, we conservatively built stable margins of ~7.2% for FY19/20E.
* Provisions normalized at Rs2.3bn (1.6% of AUM) as Gross Stage 3 level NPAs remain remarkably steady ─ down to 9% from 13.1% last year and 9.4% in the previous quarter. Management expects asset quality to improve further in H2FY19.
* We continue to like MMFS, a pure India rural play, considering the uptick in demand for vehicle finance (including tractors/used vehicles), an ability to command price, and the softening in credit costs. Maintain Buy, with a TP of Rs486 (~2.6x P/FY20E book).
* Disbursements momentum maintained; AUM growth ~26% yoy:
Q2FY19 disbursements grew strongly, up 39.4% yoy to Rs148.4bn, mainly driven by segments like used vehicle, CVs, cars (non-Maruti), and tractor lending. The strong disbursements growth was due to higher penetration and growth in the rural areas outpacing urban demand growth. However, the festival season has started in a muted fashion for the company and management hopes for a pick-up in demand during Diwali. Considering this year’s normal monsoons and steady demand momentum in rural India, we estimate an AUM growth CAGR of ~21% for FY18-20E.
* Margins improve on a yoy basis despite higher borrowing costs; yields to be hiked selectively:
MMFS improved its margins to 8.1% from 7.8% last quarter and 7.6% last year, primarily on higher growth and yields despite a marginal increase in cost of funds. Management acknowledged that, incrementally, the cost of funds is rising; however, it is confident of partially passing on the costs to customers, dealers, and OEMs. MMFS, being the market leader in many of its existing lending segments, is uniquely positioned to command better pricing for most of its products. However, we have conservatively built in stable margin trends of ~7.2% for FY19/20E.
* Gross Stage 3 assets fall on a yoy basis; credit costs normalize:
Reported Gross Stage 3 assets declined to 9% from 9.4% in Q1FY19 and 13.1% last year. Further, the annualized credit cost also stabilized at 1.6% vs. 2.1% in Q1FY19. Management pointed to an improvement in asset quality trends and expects credit costs to trend downward in H2FY19.
* Performance of subsidiaries:
Mahindra Rural Housing Finance Ltd’s (MRHFL) loans grew 33.3% yoy (+2.2% qoq) to Rs72.4bn, while net profit was up 884% yoy and 94% qoq at Rs600mn. Profits were higher even as GNPLs rose to 17.4% from 16.7% in Q1FY19 due to better yields and lower credit costs. MIBL’s net premium collected grew 4% yoy to Rs4.5bn, while PAT grew 38.8% yoy to Rs118mn. We expect both of these subsidiaries to start contributing meaningfully toward MMFS’s profitability gradually.
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