IGI Logo

Needs better quarters on growth and asset quality

Higher NPL addition and credit cost; originations growth weak across products

MMFS delivered a PAT of Rs3.7bn which was 22% lower than our expectation. While NII was largely in-line with our estimate and PPOP was higher, the sharp spike in credit cost drove the earnings miss. NPL addition was materially higher in Q2 FY25 versus the preceding quarter (~Rs8.2bn v/s ~Rs6.2bn adj. for write-offs) and there was no change in Stage-3 PCR (unlike a reduction of 3.3 ppt in Q1 FY25 on ECL model refresh). Provisioning for Stage 3 increase was Rs3bn while provionsing for write-offs stood at Rs3bn (continues to moderate). MMFS witnessed higher slippages in Tractors and LCV financing in the quarter. Overall disbursements were flat yoy and represented growth of 3% over Q1 FY25. Business Assets grew by 6% qoq and 20% yoy with a certain portion of the sequential growth driven by trade advances to dealerships (not counted in disbursements). Disbursement growth in key segments of PV financing (-3% yoy) and Used Vehicle financing (2% yoy) was weak for the second consecutive quarter. Besides the macro industry slowdown, we reckon that operational changes like implementation of Centralized Processing Centre (CPC) and new retail branch structure may have transitorily impacted the originations growth.

RoA expectations for FY25 lowered to 1.8-2%, guidance of 1.3-1.5% credit cost maintained

After harboring expectation of 2.2% RoA in FY25 for a while, the management lowered its expectation to 1.8-2%. One of the key estimates behind the new RoA expectation is of credit cost being at 1.3-1.5% during the year. Though credit cost was 1.9% in H1, the likely drivers of much lower provisions in H2 (required 1-1.2% credit cost) would be 1) reversal/recoveries of Tractor slippages with healthy kharif cash flows, 2) controlled slippages in other products with strengthened underwriting and 3) expected decline in LGD/PCR on ECL model roll fwd. Disbursement growth is expected to improve a bit in H2 FY25 supported by better traction in Used Vehicle financing, Tractor loans and SME loans. NIM is expected to be in corridor of 6.5-6.7% with stabilization of funding cost and some improvement in yield on the back of product mix shift and remaining benefits of rate actions taken last year.

Better disbursement and asset quality performance in H2 FY25 would be key

Our FY25/26 earnings estimates have undergone 7-8% cut with some downward adjustments in growth and margin and upward adjustment in credit cost. Despite significant stock underperformance, valuation has been largely unchanged (12x P/E and 1.7x P/BV on FY26) due to consistent earnings cuts. A pull-back in asset quality and improved visibility of growth in the next couple of quarters can re-rate the stock. On the other side, a miss on RoA delivery could further de-rate valuation. We maintain Neutral rating on MMFS.

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632