Mahindra & Mahindra Financial Services - PAT in-line; asset quality deteriorates marginally - Religare

Mahindra & Mahindra Financial Services (MMFS) maintained strong business momentum in Q2FY13, with a growth of 25%/34% YoY in disbursements/AUM. NIMs were stable while the C/I ratio declined QoQ due to operating leverage. GNPLs/NNPLs increased slightly QoQ owing to bad monsoons and slippages from an account of Rs.150 mn; however, the management expects recoveries to pick up from Q3. We factor in a 10% equity dilution at Rs.850 per share and roll over to a Sep'13 PT of Rs.950 per share. MMFS remains our preferred pick among AFCs.

- Growth much higher than industry: Disbursements growth was led by Auto/UVs (up 30%+ YoY), cars and the used CV segment (~40% YoY). However, CV segment growth was muted at ~10% YoY. We expect MMFS' disbursements/AUM to grow by ~22%/26% CAGR over FY12!FY15 driven by its niche presence, low base and new product initiatives. HFC disbursements increased by 71% YoY to Rs 1.06bn while the loan book grew by 62% YoY to Rs 6.8bn off a low base.

- GNPLs rise but may decline in H2: GNPLs/NNPLs rose 13%/40% QoQ to Rs 8.6bn/ Rs 3.15bn as bad monsoons impacted recoveries. An SME account of Rs 150mn too turned into NPL, but management expects it to be recovered in Q3. We see MMFS' asset quality improving in H2FY13 (in line with historical trends), but conservatively factor in higher credit costs of 1.6!1.8% over FY13!15 (vs. 1.4%/1.1% for FY11/12).

- NIMs stable; C/I lower at 33%: Calc. NIMs on AUM improved 4bps QoQ to 9.24%. The C/I ratio declined from 39% in H1FY12 to 33% in H1FY13 due to operating leverage and focus on cost efficiencies.

- Maintain BUY: Post the sharp run-up YTD, MMFS is trading at 10x FY14EPS/1.9x FY14 EPS (after dilution) - a significant premium to SHTF. However, MMFS remains our preferred pick due to its diversified product profile and robust earnings growth (we expect 23% earnings CAGR over FY12!FY15 despite higher provisions).

Source : Equity Bulls

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