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Multiple pleasant surprises

MMFS delivered a significant 40% earnings beat in Q3 FY23 on the back of betterthan-estimated loan assets growth (up 5% qoq/21% yoy), NIM (flat v/s expectation of decline), PPOP (16% higher than expectations) and asset quality (credit cost 40% lower than our estimate). Material uptick in portfolio yield (led by lending rate hikes from Nov and product mix changes), decline in Opex (due to absence of repo costs), significant absolute improvement in PAR 30 (adjusted for write-offs and even with no repo activity) and announcement of Mr. Raul Rebello, current COO, as the MD & CEO Designate were pleasant surprises.

Management commentary remains strong on growth, margins and asset quality

MMFS continues to believe that it is firmly on course to double its loans assets between FY22-25, deliver further improvement in asset quality, hold margins around the current level, improve on the cost metric as productivity benefits flows in, and deliver further significant RoE expansion

Confidence on growth stems from a) recent market share gains, b) focus on pre-owned vehicles financing, c) swift scale-up in leasing product and MSME loans, d) vehicle demand sentients remaining strong in rural areas (steady dealership footfalls and improving farm/infra cash flows) and e) encouraging growth outlook shared by OEMs

On a stable AUM mix, the management is confident about sustaining the NIM. The co. has hiked lending rates by 80 bps from November and the loan book repricing would play out as per the pace of disbursements. While the strategic investments would continue, the productivity benefits are expected to kick-in from strong growth.

Further improvement in cash flow situation of stressed customers, thrust on settlements entailing lower losses and available recourse to repo are likely to drive further improvement in Stage-2 and Stage-3 assets. MMFS sees possibility of incremental 100 bps reduction in GNPLs over the next few quarters.

Earnings/ABV estimates undergo material upgrade; raise rating to BUY

We upgrade MMFS to BUY from ADD on consistent strong delivery on growth and asset quality while displaying impressive margin resilience. We also take comfort from the announcement of Mr. Rebello as MD & CEO designate, as he has played an instrumental role in operational, strategic, and cultural improvements during the recent quarters. Elevation of an internal candidate also rules out any interruption risk which comes along with an external candidate. In the month of January, healthy disbursements momentum has continued and there has been further improvement in Stage-2 assets along with stable Stage-3 assets. In FY24/25, we estimate sturdy RoA of 2.3-2.4% (notwithstanding normalization of credit cost) and improvement in RoE towards the desired 15% mark.

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