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Earnings in line; AUM growth healthy and asset quality stable

* MAS Financial Services (MASFIN)’s PAT rose 28% YoY to INR491m (in line) in 2QFY23. NII grew 48% YoY to INR1.2b (7% beat). PPOP rose 28% YoY to INR775m (in line) during the quarter.

* PAT grew 27% YoY to INR956m in 1HFY23 (PY: INR752m). Disbursements surged 75% YoY to INR441b in 1HFY23 (PY: INR252b).

* Credit costs grew 35% YoY to INR121m (est. INR99m). Total COVIDrelated provisions stood at INR219m (~0.4% of on-book assets).

* In 2QFY23, disbursements grew 5% QoQ and 53% YoY to ~INR22.6b.

* Asset quality was stable QoQ, with GS3/NS3 at 2.3%/1.6%. In MSME and SME lending, MASFIN remains relatively better placed than its peers. Capital adequacy and liquidity on the Balance Sheet remained healthy.

* Maintain BUY with a TP of INR1,060 (premised on 3.5x FY24E BV).

AUM up 7% sequentially; spreads and margins improve

* Disbursements exhibited a healthy improvement. As a result, standalone AUM increased 7% QoQ and 30% YoY to INR71.4b. AUM in its Housing subsidiary rose 27% YoY to INR3.8b.

* The growth in 2QFY23 was broad based with Micro Enterprise (MEL) growing 27% and SME loans rising 33% YoY. AUM under the new segment of Salaried Personal loans (launched in 2QFY23) stood at INR1.3b. The yield in this segment has been in the range of 14%-19%.

* MASFIN started undertaking assignment transactions, but the share of off-Balance Sheet loans declined 200bp QoQ to 16%.

* Yield on loans (calculated) and CoF increased ~80bp/40bp QoQ to 13.5%/ 8.1%. This led to overall spreads increasing ~40bp QoQ.

* Operating expenses were elevated, with the C/I ratio surging ~200bp QoQ to ~35%, while the OPEX-to-AUM ratio grew ~20bp to 2.4%.

Sequentially stable asset quality

* The 1+dpd loans dipped ~20bp QoQ to 4.9% in 2QFY23. Total standalone COVID-related provisions stood at INR219m (~0.4% of on-book loans).

* The OTR pool fell to INR210m from INR237m in 1QFY23 (~30bp of AUM).

Other highlights

* Average ticket size of SME loans increased to INR2.3m (from INR1.7m in the previous quarter).

* MASFIN’s RoTA declined ~15bp QoQ to ~2.8% in 2QFY23.

HFC subsidiary:

* AUM grew 27% QoQ to INR3.8b. GS3 rose marginally to ~0.6% (PQ: 0.54%).

* MASFIN’s housing finance subsidiary is expected to contribute meaningfully and grow at a pace of 25-30% over the next five years.

Key highlights from the management commentary

* The management guided for a growth of 20-25%. The company will not need equity growth capital if it grows at 20-25% over the next two-to-three years.

* Management expects the contribution of vehicle finance in the AUM mix to increase to ~15% in the subsequent years.

* CRAR as of Sep’22 stood at 24.1% (Tier 1 of 21.2%). High levels of capital adequacy are based on non-dilutive growth and accretion has occurred from internal accruals.

Valuation and view

* We model an AUM/PAT CAGR of 29%/30% over FY22-FY24E with an RoA/RoE of 2.8%/17% in FY24E, respectively. The company has maintained a high quality of earnings backed by healthy growth. With the issue of bad assets decisively behind and economic activity picking up, we expect earnings growth to be strong in the coming years.

* MASFIN has successfully navigated a tough environment, with a large exposure to Microloans and the MSME sector. Disbursements and loan growth demonstrated healthy momentum, while asset quality is perhaps the best among its MFI and SME lending peers.

* Historically, MASFIN has managed its liquidity well (with higher sell-downs) and still continues to have an adequate buffer on its Balance Sheet. Maintain BUY with a TP of INR1,060 (premised on 3.5x FY24E BV).

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