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Near term outlook warrants caution...

Mahindra & Mahindra Financial Services (MMFS) reported a mixed set of Q4FY21 numbers wherein topline growth improved on account of better margins but lower disbursements led to slower AUM growth. NII increased 12.2% YoY, 9.2% QoQ to | 1511 crore on the back of improvement in NIMs (calculated) that were up 63 bps QoQ, 35 bps YoY to 7.4% owing to slightly better asset quality and liquidity management. Employee cost increased 32% YoY to | 282 crore, mainly on account of lower base effect due to reversal of provisions on incentives YoY.

Credit cost declined sequentially but remained elevated at ~108 bps of AUM as the management created overlay provisions of | 1320 during the quarter. The management wrote off loans worth | 690 crore using the same. Thus, MMFS posted PAT of | 150 crore vs. loss of | 274 crore QoQ. AUM growth at 5.9% YoY at | 81689 crore was slower than previous quarter growth of 7.8% YoY, on account of a fall in disbursements to | 5970 crore from | 6270 QoQ. Disbursements were lower due to supply side issues from OEMs and also due to less participation in Mahindra’s urban centric products like Thar. Demand from large fleet operators was decent but sub 5-10 vehicle operators are yet to show pickup in demand. The company lost market share in the tractor segment but is confident of regaining the same.

Asset quality improved sequentially as gross stage 3 assets declined 103 bps QoQ to 8.96% while net stage 3 assets fell 260 bps QoQ to 3.97% as the management created additional overlay provisions of | 1320 crore and wrote off NPAs worth | 690 crore, as a result net NPA stood below 4%. As per commentary net stage 3 assets will be kept below 4%, going ahead.

Revival in H2 remains crucial

The management indicated that with second wave of pandemic penetrating rural areas the feedback from ground level staff is mixed and warrants a cautious approach. Hence, the management would take a cautious approach in next two quarters. Thus, we believe a pickup in H2FY22 remains key. Agri segment is expected to be better with normal monsoon prediction while new digital business will be in focus, wherein it provides personal loans, consumer durable loans, etc, to existing customers. MMFS currently serves ~2.5 million customers of which initially ~5,000 would be targeted and then business can be scaled up to 50,000 customers in mid-term.

Valuation & Outlook

MMFS’ business depends on how rural economy shapes up and second wave of Covid-19 has brought new challenges to it. The management has indicated a cautious approach in the next two quarters. Hence, we believe recovery could be slower and meaningful improvement in return ratios could be delayed. RoE expected to reach modest levels of ~7% by FY23E. Thus, we downgrade our rating on the stock from HOLD to REDUCE with a revised target price of | 160/share (earlier | 140). We roll over to FY23E and value core business at ~1.1x FY23E ABV and ~| 16 as value for subsidiaries.

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