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Unwavering focus on collections; growth to lag

Based on our interactions with industry and market participants, we could gauge following trends for M&M Financial Services (MMFS): 1) Unwavering focus on collections with targeted weekly and monthly milestones and regular reviews; 2) improved collection efficiency across geographies (Q4 historically being a strong collection quarter); 3) no more refraining from repossession (in real stress cases); 4) actively pursuing upgrades from stage 1/2/3 bucket rather than forward flows (downgrades) to the next bucket. These suggest cumulative stage 2 + stage 3 assets, that went unusually high to 24%, should retrace directionally towards normalisation. However, the extent depends on how many are able to clear overdues (total EMI than single EMI). Valuations at 1.7x FY23E ABV look reasonable considering asset quality

* Unwavering focus on collections; stress likely to descend: There was a sharp spike in stress pool for MMFS with stage-3 assets rising to 10% (from 7% QoQ) and stage-2 assets at 14% (from 7.7% QoQ). In terms of accounts, 315k accounts constituted stage-2, of which 90k accounts were regularly servicing (though would not have paid in full) and 15-20k accounts were in tractor segment, where money would have started flowing. Market feedback suggests intense collection efforts are being made towards targeted 20-25% of flow back (upgrades) to stage-1. All measures are taken to contain flow forward to stage-3 (which averages around 7-8% of stage-2). Historically, Q4 witnesses an improvement in asset quality with stage-3 assets upgrading on a net basis by ~20%. On higher base and given the technical nature of slippages in Q3FY21, efforts are channelised to bring down stage-3 by 20-25% from Q3FY21 level. This is contrary to our earlier expectations of further buildup in stage-3 assets (with seasoning of stage-1/2 pool), thereby making us revise our estimates. Milestones are set for weekly and monthly collection targets and regular reviews are conducted for monitoring the progress and course correction measure (if needed).

* Collection efficiency consistently rebounding but coming at the cost of higher opex: There was consistent rebound in collection efficiency - 96%/88%/82% for Dec/Q3FY21/Oct, respectively. With revival in activity levels and focused efforts, we believe trends are looking up further for Q4. One should not be surprised if it crosses beyond 105% mark as historically it’s a strong collection quarter. Encouraging trend seems to be rising proportion of customers starting to make payment (of either single or multiple EMIs). Also, sustained repayment track record with gradual settlement of overdue installments may support upgrades into previous buckets and also cap further downgrades. However, intensive collection efforts are coming at the cost of higher opex (frequent visits/interactions with customers), but higher collection cost is the trend across industry.

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