IGI Logo

We recently met Raul Rebello (MD & CEO) and Vivek Karve (CFO) of MMFS for an update on the company’s strategy and recent developments in the sector and the company. Key takeaways: i) Gradual expansion to Mortgages and MSME lending to compliment the vehicle finance business and enable tapping of a large portion of the retail lending opportunity; ii) Prioritizing risk management in underwriting and collections has delivered sharp asset quality improvement, leading to lesser volatility and better predictability of the earnings trajectory; iii) The RoA improvement (first to 2.2% and then to 2.5%) remains a gradual work in progress with improvement in the fee yield (loan-related fees and cross-selling fees); active treasury management should further optimize cost of funds and lower credit cost to drive RoA improvement. Overall, the management has a well-thought strategy and the resources to deliver profitable growth with lower volatility and higher predictability. MMFS is poised to benefit against the backdrop of well-spread, good monsoons driving the rural and agri recovery. We shall review our estimates, rating (REDUCE), and TP (Rs270/share for Jun-25E) in due course.

Expansion into Mortgages and MSME allows for wider coverage of the lending opportunity

Over the past several years, MMFS has increasingly shed its captive financier tag with the captive M&M share now ~42%. However, concentration in the vehicle finance segment has remained one of the reasons behind cyclicality. In order to diversify and de-risk, and also to leverage strength of the M&M ecosystem, its large customer base, AAA credit rating, and strong parentage, MMFS is diversifying into Mortgages and increasing MSME exposure. It recently announced expansion into the Mortgage segment with plans to offer HL (prime and affordable), LAP, and LRD loans; it already offers SME loans (with focus on micro enterprises). Its new foray in Housing is more on the lines of universal coverage than its subsidiary which is focused on micro rural home loans.

Higher fee income, active treasury management, and lower credit cost to drive RoA improvement

To achieve its ambitious medium-term target of 2.5% ROA (once 2.2% RoA is achieved in the near term), the company has intensified its focus on key operational metrics such as NIM, fee-based income, operating expenses, and credit costs. The RoA improvement will be driven by: i) Higher fee yields (loan-related fees and cross-selling fees); ii) Active treasury management to optimize the cost of borrowing based on duration and source diversification; iii) While the operating expenses will remain sticky in the near term on account of investments in capabilities including branch and manpower to support growth, the operating leverage will kick in the medium term; and iv) With improved customer profile and product mix the credit cost should hover lower.

Credible plan in place; execution and delivery key for stock re-rating

The management’s plan to build a diversified lending franchise to deliver predictable and profitable growth looks credible. The right ingredients in terms of human resources, parentage, and liability franchise is there to execute and deliver on the plans. However, the execution of the plan will not be without hurdles and the RoA improvement will be a gradual process as sticky opex and moderate RoA profile (led by expansion to mortgage business) will make the overall RoA improvement journey slower. Overall, we came out impressed with management’s vision and see the current strategy as the right choice. However, the re-rating of MMFS’ shares should remain contingent on delivery of the strategic targets. Currently, we have a REDUCE rating on the stock with Jun-25E TP of Rs270/share as we see the current profitability of MMFS to be subpar. We shall review our estimates and rating in due course.

For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354