Buy Mahindra & Mahindra Financial Services Ltd For Target Rs. 225 - Yes Securities
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Sustained growth challenges; asset quality in‐line
Mahindra Finance’s Q4 FY21 disappointed on further growth deceleration and higher provisioning. The loan assets contracted by 3% qoq, and stood 5% lower yoy. Q4 FY21 disbursements were down 5% qoq and 15% yoy, reflecting sustained growth challenges for the company (unlikely to be the case with Chola or SHTF) on the back of constrained vehicle supply from OEMs (particularly M&M’s Auto/UV). The growth trajectory is unlikely to improve in the near term, with the widespread second pandemic wave impacting demand and operations.
Asset quality improvement was largely in‐line with our expectation and seasonality. There was a correction of 12‐15% in both Stage 2 and Stage 3 assets during Q4 FY21, with the collection efficiency materially improving through the quarter. Credit cost/provisioning was much higher than anticipated, even as Stage 1 & 2 provisions were brought down on ECL refresh, with MMFS choosing to bring down Net Stage‐ 3/NPL below 4% (in‐line with RBI’s expectation) by making an additional (one‐time) provision of Rs.13.2bn.
Considering undemanding valuation at 1.3x FY23 P/ABV and inherent procyclicality of the franchise, we retain BUY on MMFS with a 12‐month PT of Rs225. However, given growth challenges of recent quarters and a track‐record of inconsistent execution, one would prefer Chola and SHTF over MMFS.
Conference call highlights
* Disbursement impacted by OEM issue, especially in UV segment (lower M&M volumes in focused products) ‐ there has been some increase in competition from new players.
* Co. has taken an aggressive stance in customer engagement and repossession – also chose to make a provision in certain NPL buckets and then pursue collections – also made additional provisions.
* Wanted to increase Stage‐3 provisions as pandemic return has been widespread and in rural parts – now provisioning reflects the worst scenario from resolution perspective ‐ Stage‐3 assets coverage at near 60% v/s ECL model output of 33‐ 35%.
* Drop in Stage 1 & 2 provisions to 2% of business assets due to refresh of ECL model and reduction in Stage‐2 assets qoq.
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