Published on 26/04/2019 9:50:51 AM | Source: Prabhudas Lilladher Ltd

Accumulate Mahindra And Mahindra Financial Services Ltd For The Target Rs.527 - Prabhudas Lilladher

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Stellar quarter

Quick Pointers:

* Shift to multi-product strategy, market share sustenance, lower ECL provisioning and steep NPA decline boost FY19 RoAs

Best in 5 years reported asset quality (Stage 3 GNPA decline 310 bps to 5.9%; provisions reduce 200%+ YoY) and industry best AUM growth at 26% YoY at Rs 613bn led to PAT beat at Rs 5.93bn (PLe: Rs 4.10bn) in a seasonally strong Q4. While disbursements at Rs 1172.6bn stood down 11.8% QoQ largely due to paring down on MSME (NBFC lending) book and market headwinds, Management expects healthy rural pick-up with post-election and monsoon scenario stabilizing by H2FY20. We envisage RoAs stabilizing at 2.4% and RoEs climbing to 17.5% over FY20-21E led by (a) strengthening market positioning across key products and sustained rural uptick that can put up 22% AUM growth (FY21E) (b) focus on higher yielding product mix and maintaining pricing power leading to 8.5% NIMs (c) improving asset quality with GNPAs declining to 5% and credit costs restricting to <2% by FY21E. Improved EPS CAGR translates into slight uptick in target price to Rs 527 (earlier Rs 519) valuing MMFS at 2.7x FY21 ABV inclusive of subsidiaries’ value of Rs 59, however, we reiterate ACCUMULATE rating as the stock remains susceptible to cyclical and event based headwinds on the rural side. 

Rural buoyancy aids growth traction:

Defying current market turmoil, MMFS reports strong AUM growth at 26% YoY largely driven by used and CE segment. While disbursements traction took a toll in Q4FY19, Management stands confident of these picking up in H2FY20 with OEMs renewed rural strategy on the CV side gaining strength. Rural recovery has augured well as cash flows of smaller operators remain intact coupled with MMFS’ market position strengthening in CV, CE business led by deeper penetration into hinterlands prompt us to tweak growth estimate higher to 18-22% as against earlier 18-19% for FY19. Continued branch expansion and increased proximity to customer strategy has been auguring well for MMFS. 

* Robust loan mix:

MMFS has made conscious attempts to pare down the perceived risky SME (NBFC lending) business with SME as percentage of overall mix down to 5% from 8% at beginning of FY19. On the other hand, increased focus on higher yielding mix with used CV witnessing increased share in overall mix to 14% from 9% in a mere span of 1 quarter has aided robust business (26% YoY) and margin expansion (8.7%) for FY19. Robust business traction due to change in product mix (tilting more towards CE, used) that began in Q2FY19, absorption of funding pressures given the pricing power and deeper penetration across products and geographies should maintain higher order NIMs of 8.5-8.6% over FY20-21E.

* Sharp improvement in asset quality:

MMFS reported sharp improvement in asset quality with Stage 3 assets reporting steep decline of 260 bps to 5.9% and provisions contracting hugely by 222% YoY. While provision requirement under ECL methodology of INDAS continues to trend lower, we foresee credit costs to hover at 1.7-1.8% (earlier 1.7-1.9%) levels over FY20-21E. MMFS continues to maintain diligent collection efficiency improvement and hence Q4FY19 reported elevated recoveries aiding FY19 RoAs climbing to 2.6% - the best in past 5 years.


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