Published on 10/08/2020 11:58:30 AM | Source: Motilal Oswal Financial Services Ltd

Update On Mahindra & Mahindra Financial Services Ltd By Motilal Oswal

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Controlled opex leads to PPoP beat; Credit costs elevated

Mahindra Finance (MMFS) reported 1QFY21 PAT of INR1.6b (up 128% YoY, down 29% QoQ), a 3% miss. While PPoP beat our estimates by 25%, higher-than-expected provisions at INR8.4b led to the modest PAT miss.

* PPoP grew 44% YoY to INR10.4b as opex declined 38% YoY to INR3.5b. Decline in opex was largely driven by 47% YoY decline in other expenses (INR0.9b). In addition, ~2% sequential decline was seen in headcount.

* While the company did not disclose the moratorium rate in the second phase, it mentioned that 40% of moratorium customers had paid their installments in July.

* The board approved a 1:1 rights issue at INR50 per share, amounting to INR30.89b. The record date for the same is 23rd July 2020. As per our calculations, while FY21 networth increases ~25%, BVPS declines ~35% to INR123.


Tractor disbursements better v/s other segments

* While the value of assets financed declined sharply, we note the decline in Tractors was much lower (35% YoY) than that of other segments. Assuming nil sales in April, disbursements in May and June would have been largely flat YoY in this product segment.

* The loan book declined 2% QoQ/YoY to INR638b. The company did not disclose the loan mix; however, we expect it to be stable QoQ.


INR4.8b Covid-19 provisions in the quarter

* Gross Stage 3 assets increased 75bp QoQ to 9.2%. The company increased provision coverage to 40% QoQ from 31%. ECL% increased to 5.5% v/s 4.4%in 4QFY20 and 3.6% in 1QFY20.

* The company took INR4.8b COVID-19 provisions during the quarter, vis-àvis INR5.7b COVID-19 provisions in 4QFY20.

* The company has been witnessing significant improvement in collections from mid-Jun’20. ~40% of customers who availed moratorium are paying their installments ahead of their due dates.


Comfortable on liquidity

* MMFS is comfortable on the ALM front, with liability repayments of INR54.7 in 2QFY21, against a cash balance of INR85b (excl. undrawn lines).

* The borrowing mix was largely stable, except for the share of CPs increasing from nil to 3%.


Other highlights

* Mahindra Rural Housing Finance: There were nil disbursements during the quarter. PBT/PAT increased 38%/66% YoY to INR567m/INR477m. GS3% increased by ~37bp to 15.5%, while NS3% declined 85bp to 9.9%.

* MMFS has already commenced operations at 1100 of its 1320+ branches


Valuation and view

With 40% collections from morat customers in July, the initial trend is encouraging. However, the key monitorable would be whether collection efficiency has reached pre-COVID-19 levels post the lifting of moratorium in September. With the rights issue, leverage is likely to decline to 4.1x, which we believe is enough to absorb any potential asset quality shocks. We look to revise our estimates post the earnings call scheduled on 20th July


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