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PAT more than doubles YoY

M&MFS is a non-banking financial company (NBFC) that provides asset finance and other financial products and services to buyers in rural and semi-urban markets.

* Net interest income stood at Rs. 1,493cr (+7.3% YoY; 28.9% QoQ). NIM at 9.0% (+140bps YoY).

* PAT up by 237.0% YoY, mainly due to reversal of impairment costs. GNPA/NNPA at 12.65%/6.39% (vs. 15.46%/7.81% in Q1FY22).

* Good traction in the rural market for farm activities and the pent up demand in infra segment, will lead to good growth in both farm cash and infra cash. Hence, we remain positive on the stock and recommend Accumulate rating with a revised target price of Rs. 229 based on SOTP.

Write-backs in the quarter boosts PAT

Net interest income for the quarter registered a moderate growth of 7.3% YoY to Rs. 1,493cr, as the interest expense continued to decline to Rs. 1,015cr (-16.9% YoY). This was slightly offset by 4.0% decline in interest income at Rs. 2,508cr in Q2FY22. Net interest margin strengthened this quarter at 9.0% (vs 7.6% in Q2FY21). Preprovisioning profit was slightly down in the quarter to Rs. 1,016cr (-1.4% YoY) as the cost to income ratio rose to 32.6% as compared to 27.8% in Q2FY21 mainly due to costs incurred in increase of collection efforts on the back of increased economic activities and higher earnings. However, reversal of impairment costs led to an inflow of Rs. 367cr in this quarter, leading to an exceptional growth in PAT at Rs. 1,023cr (+237.0% YoY) at the end of the quarter.

Improved collection efficiency led to reduction in GNPA

In Q2FY22, improved collection efficiency has led to reduction of GNPA, release about Rs. 1,002cr from impairment cost provisions. As a result, GNPA/NNPA stood at 12.65%/6.39% (vs. 15.46%/7.81% in Q1FY22). Disbursements saw good traction in the quarter (~Rs. 6,475cr; +61% YoY) as demands have started to return to pre-covid levels. As a result disbursements saw a growth of 67% on a sequential basis. The company remains well capitalized with CAR at 26.1% with sufficient provision coverage on Stage 3 loans at 53.0% at the end of this quarter.

Key con-call highlights

* 30% of the provisions (Rs. 2,517cr in Q1FY22) has already been reversed in this quarter. The management expects to see reversal of ~80% of the provisions made in Q1FY22 by the end of the year.

* The company has restructured book of 104,130 contracts (AUM ~Rs. 4,390cr) at the end of 30th Sept 2021. Out of these 96,391 contracts are classified in Stage 2 as company believes that the risks involved in these contracts to be temporary, which were caused by second wave of Covid-19.

Valuation

The management believes that there exists a strong buoyance in demand, particularly in the rural market, seen in good crop prices with good monsoon. Pent up demand in the case of infra segment will lead to tremendous action in the rural market driven by state and central government spends. Already positive farm cash flow along with the expected infra cash flow, coupled with the festive season coming soon, we remain confident on the stock to achieve excellent collection efficiencies boosting the profitability. Hence, we recommend Accumulate rating on the stock with a revised target price of Rs. 229 based on SOTP valuation.

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