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Fails to surprise positively in (otherwise) seasonally strong quarter

We had expectations from M&M Financial Services (MMFS) of incremental signals on company treading a path towards normalisation. Especially, when Q4 is historically strong (seasonally), and peers reported lower stress and growth uptick. To our disappointment, i) stress pool (stage-2/3 assets) remained elevated at 21.5% (albeit down from 24%; not descending to our liking); ii) credit cost settled higher at 5.6% for Q4FY21/FY21 (with an endeavour to contain net stage-3 below 4%); and iii) disbursements were down 15% YoY in Q4FY21 and >40% in FY21 leading to 5% YoY contraction in AUM.

The near-term outlook, too, is not encouraging with disruption due to covid resurgence likely to prolong phase towards normalisation. We believe valuations, in the interim, will be capped at 1.3x FY23E ABV making us revise our target price to Rs160 (earlier: Rs220) and downgrade it to REDUCE from Add. Key risks to our rating: Growth returning earlier than envisaged and above average monsoon supporting asset quality.

* Unwavering focus on collection, but stress is not descending to our liking: Historically, Q4 witnesses an improvement in asset quality with stage-3 assets upgrading on a net basis by ~20%. Also, on higher base (Q3FY21 stage-3 assets at 10% and stage-2 assets at 14%) and given the technical nature of slippages in Q3FY21 (90k accounts were regularly servicing; 15-20k accounts in tractor segment, where money had started flowing), efforts were channelised to bring down stage-3 by 20-25% from Q3FY21 level. While there was an improvement with stage-2 settling at 12.55% (150bps decline) and stage-3 at 8.96% (down 100bps), the descend from Q3FY21 levels was not much to our liking. Also, decline in asset base (denominator) made ratios look optically even higher. We expect stage-3 to continue near 9.5% in FY22E and then moderate to 8.2% by FY23E. Net stage-3 will still continue to remain near 4%.

* Collection efficiency improving MoM but customer doesn’t seem to clear full overdues: With revival in activity levels and focus on recoveries, collection efficiency (including overdue accounts) has consistently improved MoM with 82%/84%/96%/94%/98%/109% for Oct ’20 -Mar ’21. This when correlated with stage2/3 numbers suggests customers are making payment (of either single or multiple EMIs) but not enough to clear their overdue installments, thereby, capping an upgrade into previous buckets. Around 3% customers have not paid any amount due in Q3FY21/Q4FY21.

* Restructuring not encouraged much but vulnerable segments flowing into stress pool: Even with further restructuring of another 262 contracts, the quantum of restructuring was negligible - Rs630mn (0.1% of business assets). Vulnerable segments such as cab aggregators, school bus, hotel / tourism, heavy CVs, etc. now seem to be sitting in stage-2/3 assets

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