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Healthy show in Q4; execution on strategic intent key

Our view

MMFS delivered a largely in-line operating performance comprising of 3% beat on NII (adding back excess interest refund of Rs1.4bn) and a marginal miss on PPOP due to sharp rise in opex. However, the opex jump needs to be seen in context of 15% qoq growth in disbursements and a substantial 17% reduction (Rs32bn) in PAR 30 portfolio (excluding material write-offs of Rs12.1bn). The PAR 30 portfolio fell from 29% of business assets as of Dec 2021 to 22% as of March 2022; within which Stage-2/Stage3 assets fell from 18%/11.3% to 14%/7.7%. This reduction caused provisioning release of Rs12.2bn which was utilized for above-mentioned write-off. ECL coverage on Stage 3 loans strengthened to 58.1% as the co. is now carrying 100% provision on 18+ ageing contracts. Std. OTR portfolio was at Rs36.3bn (5.6% of loans), of which Rs14.7bn has Nil overdues.

The management believes that enhanced collection efficiency and legal efforts (incl. repo and settlements) would help reduce Gross NPA (IRAC) by Sept 2022 thus minimizing the provisioning impact for bringing Net NPA under 6%. Encouraging business and collection trends have continued in April with disbursements (Rs27.5bn) and collection efficiency (90%) being better than pre-Covid trends

In a strategic update, MMFS articulated its aspiration for 1) doubling AUM in next 3 years, 2) maintaining Stage 3 assets under 6%, 3) increasing contribution of new products to 15% (SME, LAP, Leasing, Digi Finance, Bill Discounting, etc.), 4) sustaining NIM around 7.5%, 5) optimizing Cost/Assets to 2.5% and 6) achieving RoA of 2.5%. Key efforts in this direction would be a) finetuning/adding customer segments, b) leveraging deep rural network for product diversification, scaling pre-owned vehicles financing and market share growth, c) impetus on cross-selling across customer base, d) curated collection treatment for customer segments and e) strengthening capabilities in the areas of tech, digital and human capital

Raising of credit cost and opex assumptions impact earnings estimates even as we mildly increase growth expectations. However, our ABV estimates improve on stronger asset quality pull-back demonstrated in Q4 FY22 and elevated Stage 3 coverage intended to be maintained in the future too. Valuation at 1.4x FY24 P/ABV is undemanding in the context of improving growth, asset quality and profitability trends. We keep an ADD rating, as we would like to closely monitor execution on the articulated strategic initiatives for a couple of quarters.

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