Tractor salessupport Q1
* Amid a sharp surge in credit costs, MMFS has reported a PAT of Rs1.6bn (+127% yoy, - 30% qoq), supported by relatively strong demand in the tractor segment and a steep decline in operating expenses during the lockdown. MMFS also recognized Rs61mn in one-off gains arising from the stake sale in the AMC business.
* Disbursements during the quarter declined by ~67% yoy due to the nation-wide lockdown, yet tractor disbursements (-34% yoy) supported overall sales. AUM grew ~14% yoy/~6% qoq, mainly due to lower repayments under the moratorium.
* MMFS said that ~48% of customers are still under the moratorium and ~40% of customers, who have opted for the moratorium, have started repaying since June. Though collection numbers are encouraging, we are particularly concerned about the existing CV and PV book (including cab aggregators), where we expect the provision to remain elevated.
* We remain cautious about weak vehicle demand (ex-tractors) and higher credit costs for the CV/PV portfolio. We raise our PAT estimates by 8.6%/8.5% for FY22E/FY23E, considering margin improvement (post rights issue). We maintain Hold with a revised TP of Rs220 (Rs110 ex right), corresponding to ~1.5x P/Adj Sept’22E.
Weak demand trends to continue, normalization expected during H2FY21:
Rights issue at a stee MMFS has reported a weak demand trend across portfolio amid the Covid-19 crisis. We expect a steeper decline in AUM due to the short-tenure asset maturity cycle of the company. Management remains optimistic about the revival in tractor demand due to a healthy agri season. However, the overall demand environment is likely to improve only in H2FY21.
Liability franchise stable; concern on asset quality:
MMFS has not opted for a moratorium from banks in spite of ~48% of its customers still under the moratorium. The company is well placed to raise money from banks as well as capital markets. However, concerns remain over the asset quality profile. We remain particularly concerned about their existing CV and PV book (including cab aggregators), where the overall provision remains elevated.
Rights issue at a steep discount to current price; expect margins to surge gradually:
MMFS has announced the right issue ratio as 1:1 at a price of Rs50. The issue price is at a discount of 76% to the market price. The dilution would result in a drop in our BV estimate to Rs110/Rs118 for FY22E/23E from Rs185/Rs197. We remain concerned about the steep discount and utilization of capital towards elevated provisions rather than growth.
Outlook and valuation:
We have increased our PAT estimates by 8.6%/8.5% for FY22E/23E considering margins improvement (post rights issue). We reiterate Hold with a revised TP of Rs220 (Rs188 previously), corresponding to 1.5x P/ Adj Sept’22E. We retain the UW stance in our NBFC EAP.
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