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Strengthening the balance sheet

* Mahindra & Mahindra Financial (MMFS) reported net profit of INR1.5b v/s our PAT estimate of INR6.2b. While operating profit grew 9% YoY to INR10.5b (4% beat), higher provisions of INR8.9b (v/s our expectation of INR1.7b) drove the PAT miss. The increase in provisions is largely on account of one-off additional provisions of INR13.2b taken in 4QFY21.

* NII/PPoP for FY21 was up 8%/22% YoY, while PAT declined 63% YoY to INR3.4b. Total credit costs stood at 6% – the highest in the past decade.

* We upgrade our FY22 EPS estimate on account of lower credit costs as provisions were upfronted in FY21 itself. Buy, with TP of INR215 (1.5x P/BV FY23E).

Sharp rise in PCR to drive net NPL below 4%

* The GS 2/3 loan ratio declined 150bp/100bp QoQ to 12.5%/9%. The company reduced Stage 1/2 provisions by 100bp to 2%, but increased Stage 3 provisions to 58% (from 37% QoQ).

* The number of customers that had not made a single payment during the quarter declined to ~47k in 4Q from ~90k in 3Q. Also, only INR3b ECLGS and INR0.5b restructuring were undertaken during the quarter.

* MMFS had ~INR58b GNPLs pre-COVID and has ~INR58b GNPLs currently. However, it had only ~INR25b total provisions pre-COVID, while it has ~INR47b total provisions currently. In our view, the incremental provisions made over the past year would suffice for any potential asset quality shock arising from the second wave of the pandemic

Disbursements disappoint; loan book declines QoQ

* Contrary to expectations, disbursements declined 5% QoQ / 15% YoY in 4QFY21. As a result, the loan book declined 3% sequentially to INR646b.

* Interestingly, the share of securitization in total borrowings is up 300bp YoY to 18%. Note that it stood at 2–3% pre-IL&FS crisis.

* Spreads improved ~130bp QoQ to 9.4%. Cost of funds came in at 7.40% (down 36bp). MMFS maintains 15% liquidity on the balance sheet.

Management commentary and other highlights

* The HFC subsidiary delivered PAT of INR1.5b (flat YoY) in FY21.

* The management aims to continue to maintain sub-4% net NPLs. We expect normalcy in terms of growth after September. The expense ratio would be 2.3–2.5%.

Valuation and view

Contrary to expectations, MMFS has not yet been able to ramp up disbursements to pre-COVID levels; in our view, this is still 1–2 quarters away. Hence, we forecast 3%/11% loan growth over FY22/FY23. However, the company has done a good job of increasing provisions on the balance sheet; hence, we lower our FY22 credit cost estimate. Therefore, while our PPoP estimates remain largely unchanged, our lower credit cost estimates lead us to upgrade our EPS estimate by 60%/21% over FY22/FY23. While RoE was subdued at 3% in FY21, it should reach 13% in FY23E. Maintain Buy, with TP of INR215 (1.5x FY23E BVPS).

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