IGI Logo

Mixed Bag

M&M Financial Services (MMFS) reported PAT of INR 6.2bn (-9.5% YoY, +12% QoQ) missed our estimates due to higher provisions (credit costs at 1.2% of total AUM) on account of INR 1.35bn fraud in one of its branches pertaining to forging of KYC documents. NII was up +13% YoY, +6.7% QoQ at INR 18.1bn on the back of increase in cal.NIMs (6.3%, +15bps QoQ) driven by +11bps expansion in yields and largely stable CoFs. Lower employee costs led to an in line PPoP of INR 11.7bn (+24% YoY, +10.4% QoQ, +1% JMFe). Business Asset growth was healthy at INR 1,026bn (+24% YoY, +5.7% QoQ) led by steady disbursements of INR 153bn (+11% YoY, -1% QoQ). Asset quality improved sequentially with GS3/NS3 at 3.4%/1.28% (-57bps/-26bps QoQ) and PCR at 62% (-37bps QoQ). Mgmt revised its vision 2025 guidance from RoAs of 2.5% to 2.2% due to higher than anticipated CoFs. We believe that the fraud incident was a one-off event which was tackled with only a minor dent on P&L as it accounted for ~0.1% of total AUM. Also, the situation has now prompted the company to undertake centralized operations which should further strengthen its underwriting processes going ahead. Also with the revised guidance, we believe that the stock is currently available at an inexpensive valuation of 1.1x FY26E BV (parent) in return for 2%+ RoAs given its strong parentage and well-diversified geographical presence. We value MMFS (parent) at 1.6x FY26E BV implying SoTP value of INR 340 per share with subs valued at INR 42 (MRHF INR 16 and MIBL at INR 26 per share). Maintain BUY.

Healthy AUM growth continues: In 4QFY24, total Business Assets grew to INR 1,026bn (+24% YoY, +5.7% QoQ) on the back of steady disbursements of INR 153bn (+11% YoY, -1% QoQ). The steady uptick in Business Assets was led by growth in Pre-owned vehicle (+34% YoY, +5.7% QoQ) and Passenger Vehicles (+31% YoY). 3W segment grew sharply by +65% YoY, CV&CE grew +19% YoY and SME grew +24% YoY. The growth in tractors segment was subdued at +6.2% YoY due to industry wide demand slowdown, however, MMFS continues to maintain its market leader position in the segment. While the new segment is targeted to contribute 15% of total AUM in medium term, VF growth continues to outpace new business segments. Mgmt guided for 14-15% disbursements growth to result in 18-20% growth for FY25E. We estimate AUM CAGR of 23% over FY24-26E aided by acceleration in vehicles sales and scaling up of new initiatives on vehicle leasing.

Inline operating performance: NII grew to INR 18.1bn (+13% YoY, +6.7% QoQ) on account of improvement in cal.NIM (6.3%, +15bps QoQ) driven by +11bps expansion in yields and largely stable CoFs. Lower employee costs led to an in line PPoP of INR 11.7bn (+24% YoY, +10.4% QoQ, +1% JMFe). Steady credit costs (1.2% of total AUM) due to one-time provisioning of INR 1.36bn led to a PAT of INR 6.2bn (-9.5% YoY, +12% QoQ). We expect the margins to inch-up from here on as the CoF have largely stabilized and shift towards high yielding pre-owned vehicles and fresh disbursals at higher rate would aid in yields to move up. Mgmt revised the RoA guidance for FY25 from earlier 2.5% to 2.2% (from 1.7% in FY24) which prompted to slightly cut our PAT estimates by ~3-4% for FY25E/FY26E.

Asset Quality improves; write-off pool continues to remain high: Asset quality improved sequentially with GS3/NS3 at 3.4%/1.28% (-57bps/-26bps QoQ). PCR remains healthy at 62.3% (-37bps QoQ). Credit cost (at 1.2%, flat QoQ) was largely due to INR 1.35bn fraud in Aizawl branch (Mizoram) pertaining to forging of KYC documents. Write-offs remained elevated at INR 6bn (1.2% of total assets). Post the incident, company has tightened its due-diligence for customer on-boarding and more than 50% of the branches are under centralized check which is aimed to be 100% in next 2 months. Mgmt guided for the collection efficiencies to continue its similar quarterly trend despite slight hiccup in Apr’24 due to elections and less working days. We build in avg. credit costs of 1.4% over FY25- 26E (vs 1.7% in FY24) as PCR remains at comfortable levels now.

Valuation and View: We believe that the fraud incident was a one-off event which was tackled with only a minor dent on P&L as it accounted for ~0.1% of total AUM. Also, the situation has now prompted the company to undertake centralized operations which should further strengthen its underwriting processes going ahead. Also with the revised guidance, we believe that the stock is currently available at an inexpensive valuation of 1.1x FY26E BV (parent) in return for 2%+ RoAs given its strong parentage and welldiversified geographical presence. We value MMFS (parent) at 1.6x FY26E BV implying SoTP value of INR 340 per share with subs valued at INR 42 (MRHF INR 16 and MIBL at INR 26 per share). Maintain BUY.

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361