Published on 17/10/2020 11:35:06 AM | Source: Motilal Oswal Financial Services Ltd

Buy MAS Financial Services Ltd For Target Rs.810 - Motilal Oswal

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Sharp improvement in collection efficiency; Cautious on growth

* MASFIN posted 1QFY21 PAT of INR356m (7% miss). While NII was largely inline, lower-than-expected opex (35% below est.) resulted in a 10% beat in PPoP (INR775m). Lower opex was due to a tweak in the employee cost structure toward a variable structure.

* The entire provisioning in 1QFY21 (INR299m v/s est. of INR200m) was toward contingent provisions for COVID-19. It stands at 1.6% of balance sheet loans. Jun/Jul’20 collections (in value terms) stood at 74%/87% (v/s 45–50% over Apr–May’20).

* Overall earnings and balance sheet growth are largely in line with expectations. We maintain our estimates for FY21/FY22E and expect RoA/RoE at ~3.8%/16.4%.


AUM declines QoQ; share of assignments increases

* Due to lockdown and the lack of visibility, disbursements did not materialize over Apr–May’20. Disbursements executed over Jun/Jul’20 stood at INR1,080m/INR878m. Overall AUM declined ~5% QoQ to INR56.5b (1%+ YoY). Share of off-balance sheet loans increased to 45% (up 74bp/800bp QoQ/YoY). Management is positive on disbursements normalizing post October 2020.

* The AUM mix was largely stable QoQ, with the largest share coming from Micro and SME loans at ~61%/~30% (v/s 65%/25% YoY). During the quarter, ATS increased by 14%/35% in micro enterprise / CV loans and declined by 46%/5% in SME/2W loans.

* As of Jul’20, liquidity stood at INR13b (excl. CC line sanctions of INR7b). Furthermore, the company has INR11.3b worth of term loans and direct assignment sanctions in hand. The company has not opted for moratorium from any of its lenders.


Asset quality stable QoQ; COVID-19 contingency provision at 1.6%

* Moratorium was offered to all customers. As the collection rate is at 76%/87% for June/July, this effectively translates into 26%/13% of customers (by value) under moratorium for June/July 2020 v/s 51%/55% over Apr/May’20.

* On the balance sheet, GS3/NS3 is stable sequentially at 1.41%/1.14%. In the HFC subsidiary, the GNPL ratio was largely stable at 36bp.


Key highlights from management commentary

* NBFC partners’ collection efficiency was at 80%/93% in Jun/July’20.

* The company changed the employee cost structure more in favor of variable pay (to 50% v/s 30% earlier), and owing to moderate disbursements, opex reduced sharply. Over the longer period, it maintains guidance of 1.4–1.5% opex to AUM v/s 0.8% reported in 1QFY21.

* Expect disbursements to normalize mid-3QFY21.


Valuation and view

* MASFIN operates in a tough operating environment, with large exposure to micro loans / the MSME sector. Thus, asset quality and business growth are key monitorables. Historically, the company has managed liquidity well with higher sell-downs, which was reflected in its 1QFY21 earnings as well. It has one of the best capitalizations among the NBFCs, with Tier I of ~32%.

* We like MASFIN’s focus on profitability over growth. In this environment, growth is likely to remain muted. We largely maintain estimates. The stock trades at 3.2x/2.8x P/B of FY21/FY22E. Buy, with TP of INR810 (3.5x FY22E BV


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