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In line operating profit, but lower credit cost led to higher PAT beat

* PAT was largely flat QoQ and YoY at INR368m (40% beat) in 1QFY22. The beat was primarily driven by credit costs of INR141m (53% lower than our estimate). Operating profit at INR636m (2% miss) was largely in line with our expectations.

* Disbursements were impacted (but less so compared to its peers in MSME and SME lending) due to the lockdowns and the management’s cautious approach. Disbursements fell ~20% QoQ to INR10.4b. This also impacted consolidated AUM, which fell 4% QoQ and 8% YoY to INR54.6b.

* Even though asset quality deteriorated by ~30bp QoQ to 2.2%, it has been rather healthy compared to its peers in MSME/SME lending. Capital adequacy and liquidity on the Balance Sheet continue to remain strong.

* Earnings and Balance Sheet growth have been muted because of the management’s cautious approach. We expect a steady improvement in both loan growth and earnings once the COVID-related disruptions subside, given its strong Balance Sheet and track record of good execution in the past. We upgrade our FY22E/FY23E estimate by ~5%/2% and expect a RoA/RoE ~3.5%/13% in FY23E. We maintain our Buy rating with a TP of INR1,000 per share (3.8x FY23E BVPS).

AUM declined sequentially; spreads and NIM stable QoQ

* Disbursements declined QoQ. As a result, standalone AUM fell 4% QoQ (down 9% YoY) to INR51.6b. However, the same in its Housing subsidiary rose 3% QoQ and 4% YoY to INR2.9b. In the AUM mix, share of Micro Enterprises loans continued to decline, down 180bp to 53.5%, offset by gains in 2Ws and CV loans.

* Given the environment and muted disbursements, MASFIN has not been actively undertaking higher assignment transactions. This led to the share of off-balance sheet loans declining by a further 260bp QoQ to 22%.

* Yield on loans (calculated) improved by ~40bp QoQ to 12.7%, but was mitigated by an equal increase in the CoB (calculated). This led to overall spreads remaining stable QoQ at 4.9%.

* Healthy efficiency in operating expenses led to the C/I ratio declining by 740bp QoQ to 19%. The opex-to-AUM ratio fell ~45bp to 1.1%.

Collection efficiency though impacted, was still very good; GNPL ratio at 2.2%

* Collection efficiency stood at 93% in 1QFY22 (v/s 95% in 4QFY21), still healthy considering that the quarter was severely impacted by COVIDrelated lockdowns. GS3 ratio stands at 2.2% v/s 1.9% in 4QFY21.

* 1+ dpd loans increased by 21bp QoQ to 6.5% in 1QFY22. Asset quality in 1QFY22 remained strong despite challenges on the collection front. Total standalone COVID-related provisions stood at INR543m (1.34% of on book loans).

* It did not restructure any loans in 1QFY22. However, the management said it has a restructuring pipeline of INR150-200m (30-40bp of standalone AUM). It will objectively restructure customer loans on individual merits of the case and where there is a genuine need for restructuring.

Other highlights

* Average ticket size of SME loans reduced to INR2.2m from INR3.5m QoQ.

* HFC subsidiary: AUM has been flat (~INR2.8-2.9b) for the past nine quarters. Gross Stage 3 assets increased by 22bp QoQ to ~0.6%.

* Tier I ratio stood at 26.6%. RoTA declined by ~10bp QoQ to 2.9% in 1QFY22.

Key highlights from the management commentary

* The management is ready to capitalize on all future growth opportunities. It aspires to grow AUM to ~INR100b over the next 3-4 years.

* MASFIN has enablers in place to achieve its long term loan book growth guidance of ~25%.

Valuation and view

Despite operating in a tough environment, with high exposure to micro loans/SME sector, MASFIN has exhibited healthy asset quality due to its unique business model and ability to leverage its relationship with partner NBFCs. Given that the external environment has still not become the most conductive and customers, especially in vulnerable MSME segments, will take time to recover from the COVID-led setbacks, asset quality and business growth will remain the key monitorables.

Historically, MASFIN has managed liquidity well, with higher sell-downs. We like MASFIN’s focus on profitability over growth. We expect loan growth to remain muted in FY22E, and then steadily recover to 11-14% over FY23-FY24E. We increase our FY22E/FY23E PAT estimate by ~5%/2% to factor in lower opex and credit cost, despite modelling a decline in loan growth. We maintain our Buy rating, with a TP of INR1,000 per share (3.8x FY23E BV).

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