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Our Take:

MAS Financial Services Ltd. (MFSL) has been strengthening its lending activities in the area of its operations. Its business and financing products are primarily focused on middle and low income customer segments, which includes: (i) micro-enterprise loans (57% of AUM); (ii) SME loans (29% of AUM); (iii) two-wheeler loans (6% of AUM); (iv) Vehicle loans (new as well as used CV, cars, tractor loans) 3% of AUM and (v) housing loans (5% of AUM). It is expanding its operations cautiously stressing more on quality growth rather than quantity.

The company has a strong track record whereby it’s AUM and PAT has grown at CAGR of 39% and 40% over last 2.5 decades. As on Q3FY21 its consolidated AUM stood at Rs. 5331cr. Despite the slowdown in the industry, MFSL has been able to maintain strong growth in almost all its verticals while maintaining its asset quality profile. The company is well capitalised with CAR of 32.6% at the end of Q3FY21. Strong relationships with banks and financial institutions provides comfort as the company has cash credit facility of Rs 1,800cr out of which it has utilised 65-70% and kept rest as a liquidity buffer.

It has comfortable asset liability maturity (ALM) with no cumulative mismatches on a standalone basis. The microfinance business has been particularly hit hard due to the pandemic and MSFL has been constantly assessing the situation and recalibrating its credit policy. With focus on collections, efficiency has improved to 96% in Q3FY21. The special Covid provision stood at Rs 56cr at the end of Q3FY21 (1.66% of the on book assets) which would provide a cushion in the coming quarters.

Valuations & Recommendation:

Going forward, the company has been aiming for a 20-30% CAGR growth over next 5 years depending on the macro environment. Its core priority continues to be balancing growth with asset quality and profitability thereby generating consistent healthy RoA and RoE. We expect advances to decline by 15% in FY21E and grow at 13% CAGR over FY21E-FY23E. RoA is expected to improve to 4.3% by FY23E from 4.1% in FY20. Investors can buy the stock on dips to Rs 755-760 band (2.9x FY23E ABV) and add further in Rs 665-670 band (2.55x FY23E ABV) band for a base case fair value of Rs 823 (3.15x FY23E ABV) and bull case fair value of Rs 903 (3.45x FY23E ABV) in the next two quarters.

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