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Beat on PAT in Q3, but loss likely in Q4

PAT of INR8.9bn in Q3FY22 beat consensus forecast by 60% driven by strong bad loan recovery feeding into provision write-backs. However, high slippage, elevated stage-2 and severe impact of RBI regulations are concerning. Unlike others, MMFS has not made provisions towards the new RBI norms. Based on the new norms, reported NPLs of 11.3% would have been higher by ~7pp, which is the most severe impact among NBFCs we track. Management guided for provisions of INR5- 15bn towards new norms, indicating high odds of a loss in Q4FY22E.

Pending provisions and rural stress are keeping us cautious. We see earnings to remain under pressure with a likely loss in Q4. Maintain ‘HOLD’ with a TP of INR182 (unchanged).

Core asset quality improved but severe impact of new norms

The GS3 ratio, excluding new norms, improved from 12.7% to 11.3% QoQ. However, high slippages (net additions of INR13.6bn/9% of loans) and elevated stage-2 (including restructured book) at >17% keep the vulnerable pool high at >28%. Had MMFS adopted new norms, GS3 would have been higher by 7%, which is the most severe impact among NBFCs we track. The company will aim to achieve 6% threshold NNPLs under IRAC to avoid PCA invocation, which will lead to a high credit cost in Q4 versus write-backs in Q3/Q2. Management guided for provisions of INR5-15bn in the wake of new norms. We believe provisions will be towards the higher end of the range, which could lead to MMFS reporting a loss in Q4.

Business momentum improving, sustainability key

Disbursements revived sharply to INR80bn (+28% YoY / 24% QoQ), on the back of better agri incomes and festive demand. Management has guided for 25% disbursal growth in FY23E with easing of constraints at OEMs and market share gains. Meanwhile, sticky yields and declining cost of funds pushed margins past 8% in Q3FY22 from 7.1% in H1FY22. NII grew 14% YoY/6% QoQ while opex grew faster at 33% YoY/8% QoQ due to higher collection intensity and growth. PPOP grew 4% YoY/5% QoQ.

Outlook and valuation: Await consistency; maintain ‘HOLD’

Earnings volatility has been a key concern even pre-Covid. While the stock is inexpensive, the decision to defer provisions and a 700bp hit on NPLs from new norms will act as negative triggers. Franchise strength/strong relationships should hold the company in good stead when recovery plays through. Retain ‘HOLD/SN’.

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