Buy Mahindra and Mahindra Financial Services Ltd : Visibility improves on guided provisioning reversals - Yes Securities
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Buy Mahindra and Mahindra Financial Services Ltd For Target Rs.230
Visibility improves on guided provisioning reversals
Our view
MMFS delivered a larger-than-expected swing in profitability in Q2 FY22 which was underpinned by a sharper expansion in NIM (NII up 29% qoq) and a significant net provisioning reversal (write-back of Rs3.7bn). The key positive highlight of the quarter was GNPL reduction from 15.5% to 12.7% (no of NPL contracts reduced by 27% qoq) that led to substantial associated provisioning release (incl. a portion of management overlay) of Rs10bn.
There was a mild increase in the Stage-2 assets despite healthy resolutions (25% of opening contracts) on account of backward flow from Stage-3 and significant incremental restructuring (Rs21.5bn, 3.4% of loan assets) which is labelled as Stage-2. Total restructured pool stood at near 7% of the loan portfolio, which has been provided at 1.5x of the Stage-2 provisioning rate. A bulk of the restructured customers were in Stage-1 as of March 2021, and accounts restructured had satisfactory repayment record and higher collateral comfort.
On the business side, disbursements witnessed a sharp recovery (up 67% qoq and 61% yoy) as MMFS gained meaningful market share across most products after altering its growth stance. Thus, despite the strong collection performance, the loan assets were stable qoq (after having consistently declined since the incidence of Covid). Improvement in asset quality underpinned recovery in portfolio yield, which in turn drove a material expansion in NIM. Opex was higher in the quarter due to intensified collection cost.
Management expects loan assets to grow from hereon, collection momentum to continue, further reduction in GNPL (Net NPL expected to reach 4% by year end), correction in Stage-2 pool and incremental provionsing release of Rs11-12bn. We expect sustained positive trends in disbursements and asset quality to drive strong earnings outcomes in H2 FY22. In FY23, we expect RoA to recover above 2.5% on acceleration in growth and decline in credit cost. Retain BUY with increased 12m PT of Rs230.
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