Buy Mahindra & Mahindra Financial Services Ltd For Target Rs.152 - HDFC Securities
Mahindra & Mahindra Financial Services Limited (“MMFS”) enjoys strong market presence in the Utility Vehicle and tractor financing segments. Well diversified product portfolio, deep rural presence, long track record of operations passing through various credit cycles and relatively easy access to funds are key positives. MMFS being a rural and semi urban focused NBFC has high dependence on agriculture where there can be challenges on account of volatile cash flows of borrowers. Despite these inherent challenges, its AUM has registered a growth of 18% CAGR over FY12-20 which clearly is a testimony of its sound business model. The company has strong capital base and positive ALM across the basket. Management has been continuously focusing on rationalizing cost structure (aims to bring coststo-assets ratio down to 2% by end FY21). This should support earnings further. Faster recovery in rural sector will drive growth for the company. Lower than expected loss on existing NPAs, lower than expected incremental slippages and hence lower than expected credit costs could be upside risks for MMFS.
MMFS remains a superior liability franchise compared to peers. It derives strength from ability to tap into liquidity from its parent M&M Limited. There might be near term volatility in the performance of the company due to the uncertainty prevailing in the industry due to Covid-19 induced slowdown. MMFS has raised Rs.30.89bn from rights issue to buffer up its Capital adequacy to face uncertain Covid times. We expect that, from FY22 onwards, things will be normalize and we are expecting to see a sharp uptick in the earnings. Currently, MMFS is trading at just 1.3x FY22E ABV (Adjusted for subsidiaries value), which means that most of the negativities seem to be priced in. Due to bumper crop and rise in crop realization, most of the slippages could get reversed soon.
Valuations and Recommendations:
We have forecasted NII growth of 8% CAGR and net profit growth of 22% CAGR (due to lower provisioning requirement) with advances growth of 5% CAGR over FY20-22E. NIM is expected to remain stable around current levels. NPAs might spike up further in FY21 but will soon start normalizing from FY22E onwards. We feel that investors can buy MMFS at LTP and add on dips to Rs.115-117 band (0.95xFY22E ABV + Rs 18 for stake in MIBL) for SOTP based Base case fair value of Rs.144 (1.22xFY22E ABV + Rs 18 for stake in MIBL) and the SOTP based Bull case fair value of Rs.152 (1.3xFY22E ABV + Rs 18 for stake in MIBL) over next 2 quarters.
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