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2025 targets contingent on flawless execution

In 4QFY22, M&M Financial (MMFS) generated PAT of INR 6bn (4x YoY/ -33% QoQ), helped by reversal of provisions. Operational performance was weak (PPOP declined 15% YoY/ 15% QoQ) due to: i) tepid interest income on account of provision for excess interest refund (INR 1.4bn or 6% of interest income), ii) high opex (cost to asset: 3.4% vs. 2.5% YoY/ 2.9% YoY). Disbursement was strong (+54% YoY/ +15% QoQ) though higher repayment resulted in decline in AUM (-2% YoY/ -2% QoQ). During 4QFY22, GS3/ NS3 (IND-AS) improved to 7.7%/ 3.2% (vs. 11.3%/ 5.6% QoQ), respectively. The company also organized Analyst Meet and mentioned Vision 2025, key highlights are: i) Stabilize asset quality with GS3<6% through product diversification, customer segmentation, collections-war-room and legal tech, ii) Recharge Growth: 2x AUM through leadership in vehicle finance, scaling up new growth engines (such as SME lending, LAP, leasing, Digi Finco), cross-selling and premiumization, and partnerships with OEMs & Dealers, fintech & aggregators, iii) Strengthen Tech & Digital: digitalizing core by building scalable & resilient tech with cloud 1st architecture and leveraging AI/ML based models across customer lifecycle for better CX, iv) Future Ready Human Capital: optimizing capability mix across the organization through upskilling & hiring and utilizing latest tech infrastructure to drive productivity. The company would like to have sustainable profitable growth through new business contribution of 15%, NIM of ~7.5%, cost to asset of ~2.5% to generate RoA of ~2.5% by 2025. Given the leadership in rural financing, backing of strong parent, robust capital adequacy (Tier-1: 24.3%) and digitalization at the centerpiece, MMFS can quickly come back from down cycles as demonstrated in previous down cycles. However, stabilization of asset quality will remain the key resulting in sustainable return ratios. Going forward, we estimate MMFS to deliver RoA/ RoE of 2.1%/ 10% in FY24E (vs. 1.3%/ 7% in FY21), driven by reducing credit costs and pick-up in volumes. Given the segment MMFS caters to, its business is highly cyclical with fluctuating credit costs leading to earnings volatility, thus supressed valuations. A consistent pick-up in volumes with a narrow range of credit costs can lead to upside in valuations. We value MMFS using SOTP giving a TP of INR 220.

Disbursement continued the healthy trajectory while AUM compressed: In 4QFY22, business environment returned to normalcy and disbursement trends indicated rural demand and volumes attained pre-Covid levels. Furthermore, contact intensive businesses reopened and there had been better visibility on cash flows – both from farm & infra. The confluence of these led to strong disbursement at INR 92bn (+54% YoY/ +15% QoQ), driven by CV/CE (4.3x YoY/ 3.2x QoQ) and Pre-owned vehicles (+88% YoY/ +35% QoQ). In the tractor and Mahindra UV (utility vehicles) financing segments, MMFS maintained leadership. Mix wise, share of pre-owned vehicles surged to 18% (vs. 6% YoY) though Auto/ UV (34%) and cars (19%) contributed the majority share. Despite healthy disbursement, AUM (at INR 812bn) shrunk 2% YoY/ 2% QoQ due to improving repayment trends. Per mgmt., sentiments are positive but customers are cautious and would like to keep money to overcome any uncertainties wrt Covid, hence there is better demand for need based products while aspiration based products (such as consumer durables, 2W) are yet to recover meaningfully. Vehicle inventory continued to be subdued, hence non availability of new vehicles led sluggishness in vehicle exchange programs. Pre-owned vehicles remained in demand. We forecast AUM CAGR 15% over FY22-24E helped by improving market share, higher vehicle prices, increasing rural spending, pickup in government spending and new initiatives such as SME lending and vehicle leasing

Lacklustre operational performance: In 4QFY22, operating profit was at INR 9bn (-15% YoY/ -15% QoQ) due to: due to: i) tepid interest income on account of provision for excess interest refund (INR 1.4bn or 6% of interest income) as advised by RBI, ii) high opex driven by technology spending and expanding employee strength. Cost to asset ratio expanded to 3.4% (vs. 2.5% YoY/ 2.9% YoY) as costs picked-up with volumes but assets (AUM) are consolidating. NII declined 1% YoY/ 5% QoQ as NIM (NII/AUM) dropped 40bps QoQ to 7.6%. Given the financier is developing new products and digitalizing the operations, costs will remain elevated and PPOP growth will be under pressure in near term. We expect PPOP CAGR of 13% over FY22-24E

Asset quality sequentially improved, driven by robust collections: In 4QFY22, collection efficiency stood at 100%, with 109% in March. Mgmt. opted to implement the updated norms under IRACP w.e.f., hence it did not disclose GNPA (IRACP) no. (17% in 3QFY22). GS3/ NS3 (IND-AS) improved to 7.7%/ 3.2% (vs. 11.3%/ 5.6% QoQ), respectively, partially, aided by write-off (INR 12.1bn). Coverage on GS3 expanded to 58% (vs. 53% QoQ). GS2 assets improved to 14.3% from 17.8% QoQ, and restructured assets fell 40bps QoQ to 5% of AUM and were majorly in GS2. Mgmt. is seeing correction in GNPA (IRAC) and would like to further reduce it to converge with GS3. We pencil-in avg. credit costs of 300bps over FY22-FY24E (vs. pre-Covid avg. of 185bps)

Maintain BUY with TP of INR 200: Using SOTP, we value MMFS standalone at 1.3x Mar’24E BV implying a value of INR 195 per share. We expect MMFS to deliver RoA/ RoE of 2.1%/ 10% by FY24E recovering from 1.3%/ 6.5% in FY22. Considering the subs, we value MRHF at INR 18 per share and MIBL at INR 7 per share, resulting in a TP of INR 220

Subsidiary performance:

Mahindra Rural Housing Finance (MRHF)’s – deterioration in asset quality: The subsidiary posted loss of INR 10mn (vs. PAT of INR 345mn YoY/ INR 670mn QoQ). Number of customer contracts expanded 50% YoY to 29,915 and disbursements jumped to INR 6.5bn (+53% YoY/ +33% QoQ). Loan book stood at INR 70.3bn (-1% YoY/ flat QoQ). Gross stage 3 ratio dropped to 11.3% from 16.2% QoQ.

Mahindra Insurance Brokers (MIBL)’s PAT increased to INR 210mn (81% YoY/ 17% QoQ) aided by soft base – policies for 4QFY22 were up 26% YoY. Productivity meaningfully improved YoY with average policy at INR 14,224 vs. INR 11,605 in 3QFY22.

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