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-      MAS Financial Services (MASF)’s 3QFY24 PAT grew 24% YoY to INR624m (in line). PPOP rose ~35% YoY to INR1.1b (in line).

-      Operating expenses rose ~23% YoY to INR518m, with both the C/I ratio and Opex-to-AUM stable at 32% and 2.2%, respectively. Credit costs were at INR257m, translating into annualized credit costs of 1.1% (PQ: 1.1%).

-      MASF recently took an enabling Board resolution to raise up to ~INR7b in one or more tranches through QIP or any other permissible mode. Despite capital adequacy of ~24.5% (Tier 1 of ~21%), this equity raise will be done at an opportune time for the next phase of growth.

-      MASF has also declared the Bonus issue of shares in the ratio of 2:1. The record date has been fixed as 22^nd Feb’24.

-      Reiterate BUY with a revised TP of INR1,160 (based on 2.7x FY26E BV).

Healthy disbursement momentum; AUM rose ~27% YoY

-      Standalone AUM grew ~7% QoQ and ~27% YoY to ~INR97b. AUM in the HFC rose ~36% YoY to INR5.4b. AUM of micro-enterprise loans (MEL)/ SME loans/2Ws rose 15%/21%/34% YoY. Salaried personal loans were ~6% of the AUM mix, and MASF expects to keep them below 10% of the mix.

-      MASF’s thrust on distribution and branch expansion continued, with direct retail distribution contributing ~66% of the AUM mix as of Dec’23.

Sequential compression in NIM and spreads

-      CoF (calc.) increased ~50bp QoQ to 9.7% while yields (calc.) rose ~30bp to 14.8%, driving ~20bp contraction in spreads to ~5.1% (PQ: 5.3%).

-      MASF borrows term loans from banks for lending to the PSL sector and doesn't foresee a significant increase in its CoB due to the RBI RWA circular. Management guided for a NIM of ~7.0% over FY25-FY26.

Minor increase in 1+dpd; asset quality largely stable

-      The 1+dpd loans rose ~25bp QoQ to 5.8% in 3QFY24. Total standalone Covid-related provisions stood at ~INR188m (~0.25% of on-book loans).

-      On-book GNPA increased by ~5bp QoQ to 2.23%. NNPA was stable sequentially at 1.48%. PCR on Stage 3 assets increased ~30bp to ~41%.

Other highlights

-      Average ticket size of MEL declined further to ~INR42K (PQ: ~43K).

-      RoTA declined ~5bp QoQ to ~2.9% in 3QFY24.

HFC subsidiary:

-      AUM grew 36% QoQ to INR5.4b. GS3 remained stable at ~0.8%.

-      The company continues to carry Covid provisions of ~0.72% of the AUM.

Key highlights from the management commentary

-      The company plans to introduce used-car loans as a new product.

-      Management guided for an AUM CAGR of 30-35% in its HFC subsidiary over the medium term. HFC AUM will be ~INR15b within the next three years and the parent will infuse equity capital as and when required.

Valuation and view

-      We model a standalone AUM/PAT CAGR of 22%/25% over FY23-FY26E with an RoA/RoE of 3.0%/18% in FY26E. The company has maintained a high earnings quality, backed by healthy AUM growth. With improvement in economic activity, we expect its earnings growth to be strong in future.

-      MASF has developed a niche expertise to serve the MSME market and continues to demonstrate healthy loan growth momentum, while its asset quality is perhaps the best among MFI and SME lending peers.

-      Reiterate BUY with a TP of INR1,160 (premised on 2.7x FY26E BV). Key risk: Slowdown in the economic environment leading to a sluggish loan growth and deterioration in asset quality.

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