Buy MAS Financial Services Ltd For Target Rs.325 by Axis Securities
Steady Quarter; Navigating Headwinds while Maintaining Portfolio Quality!
Est. Vs. Actual for Q3FY25: NII – BEAT; PPOP – BEAT; PAT – MISS
Changes in Estimates post Q3FY25
FY25E/FY26E/27E (%): NII: +5.1/+5.8/+5.3; PPOP: +4.2/+3.2/+2.6 PAT: +2.2/+0.7/-0.2
Recommendation Rationale
* Asset quality takes precedence: MAS has consistently maintained healthy asset quality metrics despite a weak credit cycle, adhering to its principle of extending credit where due. The uptick in asset quality metrics in Q3FY25 was primarily driven by stress in the MEL portfolio, where borrowers appear over-leveraged and vulnerable to an economic slowdown, leading to rising delinquencies in a challenging macro environment. The management has also indicated some overlap between MEL/MFI customers in the 2-wheeler segment and continues to monitor this portfolio closely. While stress is visible across segments, the company is tightening credit filters, strengthening underwriting norms, and implementing additional guardrails, particularly in the MEL and SME portfolios, where delinquencies remain elevated. MAS remains committed to prioritising asset quality over growth, with the management confirming that it will not hesitate to slow down expansion if required. The company expects stress to gradually stabilise over the next couple of quarters.
* Growing in a calibrated manner: MAS intends to grow its AUM at a healthy pace of 20-25% on a sustainable basis, aiming to double its AUM to Rs 20,000 Cr by FY28. This growth will be driven by the further strengthening of its direct distribution and healthy expansion in the SME, Wheels, and SPL segments. The housing subsidiary plans to accelerate growth, delivering a consistent 25-30% AUM increase over the medium term and contributing meaningfully to overall growth. MAS aims to maintain the share of direct distribution at 70-75% on a steadystate basis. We expect MAS to deliver a healthy AUM growth of 23% CAGR over FY25-27E
* NIMs to remain stable with a positive bias: The company expects CoF to remain stable at current levels. The recent rating upgrade has provided a benefit, helping contain CoF. In the event of a rate cut, the benefit on CoF would be passed on with a lag, as a large portion of MAS’ borrowings are MCLR-linked. Yields on the portfolio are expected to remain largely protected, as most loans are fixed rate and the company's borrowers are largely rate agnostic to minor yield changes. Going forward, pricing will be driven by the macro environment and competitive intensity. However, any significant benefit on CoF will be passed on to end customers. We expect margins (calc.) to range between 7-7.2% over FY25-27E.
Sector Outlook: Positive
Company Outlook:
The ramp-up of the direct distribution network will support MAS’ ambitious AUM growth plans. However, it will impact Opex ratios and credit costs. The management expects the C-A ratio to rise to 2.75-3% over the medium term due to investments in the distribution network and franchise. Similarly, credit costs are expected to increase and stabilise at 1.5% on a steady-state basis. However, the rise in Opex and credit costs will be adequately offset by better yields, allowing MAS to maintain RoA in the range of 2.75-3.25%. We expect MAS’ RoA/RoE to range between 3-3.1%/14-16% over FY25-27E, supported by (1) steady and profitable growth, (2) stable NIMs with a positive bias, and (3) contained credit costs.
Current Valuation: 1.9x Sep’26E BV Earlier Valuation: 2.1x Sep’26E BV
Current TP: Rs 325/share Earlier TP: Rs 355/share
Recommendation: We maintain our BUY recommendation on the stock.
Financial Performance:
* Operational Performance: MAS’ disbursements growth was strong at 18/5% YoY/QoQ. The share of sourcing from NBFC partners further reduced QoQ to 34.6% vs 33.9% QoQ. AUM growth stood at 21/6% YoY/QoQ (largely in line with our expectations). The MSME segment (77% Mix) grew by 15/3% YoY, with Microenterprise loans growth softening and growing at 8/- 1% YoY/QoQ and SME up 24/8% YoY/QoQ. In the wheels portfolio, CVs were up 47/8% YoY/QoQ, and 2-wheelers grew by 21/14% YoY/QoQ. The salaried personal loans segment grew by 69/35% YoY/QoQ
* Financial Performance: NII grew by 40/12% YoY/QoQ aided by healthy AUM growth and margin (calc.) improvement of ~37 bps QoQ. NIMs (calc. on an AUM basis) stood at 7.3% vs 6.9% QoQ. Non-interest income grew by 3% YoY and was down 4% QoQ. Opex continued to reflect investment trends as the company shifts towards direct distribution model and grew by 30/7% YoY. C-I Ratio stood at 32.7% vs 33% QoQ. PPOP grew by 25/8% YoY/QoQ. Credit costs were higher than expected and stood at 162bps vs 137bps QoQ, hurting earnings. Earnings grew by 25/1% YoY/QoQ.
Asset Quality deteriorated with GNPA/NNPA at 2.41/1.62% vs 2.36/1.57% QoQ.
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SEBI Registration number is INZ000161633
