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Volatility concerning

After a dismal Q1FY22, Mahindra & Mahindra Financial Services (MMFS) posted better-than-expected Q2FY22 PAT of INR10.2bn. The quarter saw strong recovery (higher collection efforts) feeding into provision write-backs, leading to a PAT beat. While management sounded confident of sustaining performance, we await further datapoints to draw a trend (given stage-2 at 20% is concerning).

The key concern regarding MMFS has been volatility, and we expect the trend to sustain given the uncertain environment and business pressure. Factoring in better recoveries, we are raising FY22/FY23E BV by 8%/7%; this coupled with a rollover to FY23 yields a revised TP of INR182 (INR160 earlier); retain ‘HOLD’.

Asset quality improves, but too early to draw any trend

MMFS’s asset quality improved with gross stage-3 declining to 12.7% (15.5% in Q1FY22). However, stage-2 (including restructured book) remained elevated at 20% keeping the vulnerable pool high at 33%. While management is confident of a swift recovery (highlighting earlier cycles), we choose to remain cautious, given chequered history and potential risk of a covid wave (albeit declining). Collection efficiency improved to near 100% in Sep-21; this coupled with H2 being seasonally strong gives us some comfort on management’s commitments. We, however, would await further data-points to draw a trend given various variables at play.

Business momentum improving, sustainability key

Disbursements revived sharply to INR65bn, largely on the back of: i) resumption in mobility; and ii) better agri incomes on good monsoons. According to management, disbursements could have been better had there not been supply-side issues. As the second quarter has been much better, it does instil some faith on potential reversal of provision made in Q1 as well as NPA recoveries. Meanwhile, sticky yields and declining cost of funds continue to push margin upwards. All in all, delivery of asset quality stability, growth and regaining of market leadership is critical for MMFS to sustainably deliver on its strong franchise.

Outlook and valuation: Await consistency; maintain ‘HOLD’

With persistent uncertainty around asset quality given higher vulnerable pool, we expect earnings to remain under pressure. Franchise strength and strong relationships should hold the company in good stead though, when recovery plays through. Maintain ‘HOLD/SN’.

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