Update On Mahindra & Mahindra Financial Services Ltd By Motilal Oswal
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Dec’21 disbursements in line
Improvement in collection efficiency led to MoM reduction in Stage 2 and Stage 3
Key takeaways from MMFS’ pre-quarterly release:
* MMFS reported Dec’21 disbursements of INR27.5b (up 42% YoY). The company’s 3QFY22 disbursements stood at INR79.8b (up 27% YoY/23% QoQ). Its 9MFY22 disbursements rose 41% YoY to INR183b.
* MMFS’ 3QFY22 collection efficiency (CE) declined 300bp QoQ but improved 700bp YoY. CE improved to 100% in Dec'21 from 94% in Nov’21. Its CE stood at 95% in 3QFY22 (v/s 98% QoQ and 88% YoY).
* MMFS reported a MoM reduction in both Stage 2 and Stage 3 in Dec’21. This reduction was after two consecutive months, wherein the Stage 3 either remained rangebound or stable. The company reiterated that it will bring the Net Stage 3 (not necessarily NNPA under I-GAAP accounting) below 4% by Mar'22.
* While its liquidity remains very comfortable, MMFS has started to rationalize its liquidity buffer on the balance sheet (B/S). As of Dec’21, it has brought down the liquidity on the B/S to 3.5 months from 6 months earlier. This will lead to reduction in the negative carry on its B/S and mitigate the impact on NIM. However, this has to be viewed along with the requirement of liquidity coverage ratio (LCR) that has become applicable for NBFCs from 1st Dec’21.
* The 3QFY22 disbursement levels reported by MMFS seem to suggest that it has been able to maintain its market share and has started to accelerate its disbursements. Improvement in CE will support the company in delivering guided levels of 4% net stage 3 (NS3) by Mar’22. However, the recent RBI regulations on daily stamping of NPA as well as stricter NPA upgradation norms pose an overhang on the quantum of credit costs in 2HFY22. This also questions the ability of MMFS to do provision write-backs over the next two quarters.
* We expect the company to deliver an RoE of ~12-13% over the medium term. We find its current valuations of 1.1x FY23E P/BV attractive from a riskreward perspective and maintain our BUY rating on the stock.
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