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A strong operating show

MMFS delivered a strong operating performance characterized by robust disbursement and loan assets growth and strong asset quality. Reduction in NIM and elevated opex weighed on PPOP growth. This notwithstanding, the PAT was 15% above expectations on lower credit cost.

Asset quality moving in right direction

Sturdy momentum in collections and recoveries underpinned significant reduction (10% qoq) in Stage-2 assets and stable Stage-3 assets (after adding back the Rs5.4bn write-off). The ensuing provision releases drove lower credit cost in the quarter despite the material write-off. Stage-2 assets stood at 9.7% (vs. 11.7% in Q1 FY23) and Stage- 3 assets were at 6.7% (vs. 8.0% in Q1 FY23). In October, Stage-3 has marginally increased to 7% due to usual collection dip (91% CE - similar to Oct’21). Based on the IRACP norms, the GNPA is higher by ~Rs9bn as of October (around 8.2%). Assuming that these loans would be in Stage-2 under Ind-AS and carrying the bucket provisions of 10%, the Net NPA as of October could be near 4%. Thus, there may not be any requirement of making additional provisions during the year on account of IRACP migration.

Growth has picked-up significantly

Disbursements at Rs118bn were 25% higher qoq, and accelerated AUM growth to 9% qoq/16%yoy. The business growth is driven by robust traction and focus on used vehicle financing, SME loans, CV/CE loans and M&M Auto/UV financing. The co. has also been looking to tap into the adjacent relatively formal customer segment for augmenting its growth trajectory. MMFS has disbursed loans worth Rs52.5bn (up 97% yoy) in October, implying that AUM growth has further accelerated.

Margin to recover over time

NIM declined to 7.5% (7.7% for H1 FY23) with increase in borrowing cost, change in asset mix (stronger growth in SME, CV/CE and Auto/UV), tapping of relatively formal customer segment and increased liquidity on the BS. There is also a marked shift towards Bank and CP borrowings during H1 (share rose from 29% to 43%) in order to fund the substantial growth acceleration. The co. had not raised lending rates in the run-up to festive period, but it is being done now. Management expects NIM to stay around the 7.5% mark in the longer run. Further growth pick-up in used vehicle and tractor financing should aid margins.

Sustenance of growth momentum and further recovery in GNPLs would be closely watched in coming quarters. Management remains reasonably confident on both aspects. We raise FY23/24 earnings estimates by 8%/4% respectively on lifting growth assumptions and moderating credit cost estimates. The prospects of significant RoE expansion would support gradual re-rating of the stock. Current valuation is not demanding at 1.7x FY24 P/ABV.

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