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Another quarterly loss driven by elevated NPAs

* MMFS reported a net loss of Rs1.53bn in Q1FY22 (Emkay estimate: Rs2.4bn profit) due to weak growth momentum and a surge in provisions. MMFS increased provisions by 234.5% yoy/218.1% qoq to Rs28.2bn amid deteriorating asset quality. Management made an additional overlay of Rs3.9bn, resulting in a total management overlay of Rs27.1bn.

* Disbursements remained weak at Rs38.7bn (+42% yoy, -35% qoq). AUM declined ~3.3% qoq (-3% yoy) to Rs789.6bn. Demand remains weak across segments, but management is optimistic about growth in H2FY22 with the normalization in activities. However, any signs of the third Covid wave could weigh on growth.

* GNPA increased to ~15.5%, mainly contributed by cab aggregators, buses, and MHCV portfolios. The trend in recoveries has been improving since Jun’21 and management remains confident of recoveries and provision reversals by Q4FY21. However, considering past experiences and current restructured book (~2.8% of AUM), we remain cautious.

* We trim FY23E/24E earnings by ~3%/3.8% and roll forward to Sep’22 to arrive at a TP of Rs150 (Rs158 earlier), corresponding to ~1.1x Sep’23E Book. Maintain Hold and EW in EAP. We see a limited downside hereon, considering favorable risk-reward. However, we expect MMFS to continue to underperform other vehicle financiers.

Demand trends uncertain; normalization expected in H2FY22:

MMFS saw weak demand across portfolios due to the second wave of Covid-19 and country-wide lockdowns in Q1FY22. Management remains optimistic about growth in H2FY22 with the normalization in activities. However, any signs of the third Covid wave could weigh on growth. Management is also positive about a revival in tractor demand due to a healthy agri season and relatively better performing rural geographies..

Liability franchise remains stable; asset quality is a concern:

MMFS is well placed to raise money from banks and capital markets. However, concerns remain over its asset quality profile. Margins (Calculated) in the quarter stood at ~577bps (vs. ~740bps in Q4FY21) due to the reversal of Rs2bn in interest income during the quarter.

Outlook and valuation:

We remain cautious, considering the third wave of Covid could further hamper overall credit demand and affect the collection mechanism of the company even in the current financial year. We reduce FY23E/24E earnings by ~3%/3.8% and roll forward to Sep’22 to arrive at a TP of Rs150 (Rs158 earlier), corresponding to ~1.1x Sep’23E Book. Maintain Hold and EW in EAP. We see a limited downside hereon, considering favorable risk-reward. However, underperformance to other vehicle financiers will continue.

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