Buy M&M Financial Services Limited For Target Rs. 180 - Yes Securities
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Our view ‐ Asset quality improvement key to stock’s outperformance
MMFS reported a large loss of Rs15.3bn (10%+ of Net‐worth) in Q1 FY22 due to substantial deterioration in PAR metric that depressed NII and inflated credit cost. Lockdown/restrictions impacted customers’ income and company’s ability to collect, and thus 1) Stage‐1 assets declined from 78.5% as of March to 65% as of June. 2) Stage‐ 3 jumped from 9% to 15.5% and 3) restructuring increased from a negligible figure to 3%+ (part of Stage‐2 assets).
Disbursements were expectedly lower at Rs39bn (35% lower qoq), leading to 1.6% contraction in Business Assets. Substantial interest reversal of Rs2bn drove 200+ bps decline in portfolio yield which caused NIM (Gross Spread) compression from 7.7% to 6.3% on qoq basis. The substantial spike in PAR 30 (from 21.5% to 35%+ incl. w/offs) mandated ECL provisioning of Rs24.3bn in Q1 FY22. On top, MMFS added Rs3.9bn to its overlay provisions which now stands at Rs27bn (all included in 54% ECL coverage on Stage‐3).
Management expects rollbacks and provisioning release in H2 FY22 for majority loan contracts that slipped into Stage 2 & 3 buckets during Q1 FY22, as these customers have either made some repayment during the quarter or have <50% of their loan outstanding. There has been a sharp improvement in collection efficiency since mid‐ June. In our assessment, there exists high probability of absolute credit cost for the full‐year being materially lower than Q1 FY22 if collections were to not see another disruptive phase. It would be the case even in a scenario of portfolio’s dpd construct not improving to March 2021 levels. While MMFS’s has disappointed on asset quality and growth in the recent past, stock’s valuation at 1.3x FY23 P/ABV has limited room for further de‐rating. Rather a re‐rating could ensue if collections and business environment witness a sustained recovery. Retain BUY; but have reduced 12m PT to Rs180.
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