Mahindra & Mahindra Financial Services - Strong show continues - Prabhudas Lilladher

MMFS delivered strong Q1FY13 results with a PAT of Rs1.6bn (up ~58% YoY). PAT growth (YoY) seems exaggerated and is not strictly comparable, but AUM growth (38% YoY) and stable YoY margins have come as a positive surprise. Disbursement growth has moderated but that is largely factored in growth expectations. Asset quality remains strong and with robust growth expectations and improving ROE trajectory, we maintain BUY but bad monsoon will continue to remain a risk.

- Strong show on growth; expected to moderate: MMFS delivered ~38% YoY growth in AUMs with strong traction in cars and CV. Disbursements (assets financed) growth has come off to 23% YoY from ~35% last year driven by slow disbursements in tractors (6% YoY). Management expects to maintain ~25% disbursements growth and given current trends, we do not see risks to our 24% AUM growth assumption.

- Moderating rate cycle positive for margins: Calculating a margin is not comparable YoY as accounting for securitisation income had been changed from Q1FY12 (proportionate accounting now v/s upfront booking earlier). Adjusted margins have held up despite a rising rate environment and we believe MMFS will be a beneficiary of a moderating rate cycle due to its large fixed rate asset book. Also, margin risks for a move from assignment to PTC route of securitisation will be limited, given low off balance sheet dependence for MMFS.

- Asset quality robust: could monsoons be a spoiler? Gross NPAs have inched up inline with the seasonal trend and conservative provisioning has led to higherthan-expected credit costs in Q1FY13 (Rs140m of Rs840m of provisions). Poor rainfall will be a spoiler but management believes that all structural asset quality drivers remain in play and is comfortable with asset quality. We factor in a normalisation in credit costs from ~1.1% to 1.75% in FY13 but believe that bad monsoons remain a risk.

Source : Equity Bulls

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