Mahindra & Mahindra Financial Services - Rising euphoria, stretched valuation; maintain Add - BRICS

MMFS has been one of the best performing stocks on the Street in the last two months, up nearly 29%, driven by a stream of positive news flow - partial stake sale in MIBL (insurance broking subsidiary), followed by raising of fresh equity through a QIP in the parent company, MMFS. We spoke to the management to find out if there could be more legs to this rally, driven by additional news flow over the next couple of quarters and there seem to be quite a few drivers. One, based on investor feedback on low trading liquidity of its shares, management could consider issuing bonus shares, or go in for a share split in the future. Second, management believes MIBL could expand its offices globally to cater to reinsurance broking with foreign reinsurers. Third, the parent "auto/home finance" company is likely to follow the footsteps of its parent (M&M) to expand in South Korea and South Africa. Still, the current valuation (2.4x 12 month forward book) is rich in our view, although incremental news flow could keep the stock buoyant. We like MMFS for its strong core business of auto and home finance and geographical diversification into related businesses. Retain Add while raising target price to Rs930 (from Rs805).

QIP boosts book value: MMFS raised Rs86.7bn by issuing 9.75mn new shares at a price of Rs889 per share, at a 12 month forward book multiple of 2.1x post dilution. We expect the deal to have a positive impact on the NIM (10-30bps) and improve Tier 1 ratio by 4%. Owing to expanded common equity, RoE will remain depressed through the next two years. Our PAT estimates are up 1.8% and 4% for FY13 and FY14 respectively, although EPS is down 1% and 4.7%, owing to the higher number of shares.

Introducing FY15 estimates: Our FY15 EPS estimate stands at Rs95, up 18% over our FY14 estimate (FY12-15 CAGR of 16.8%). We continue to expect the contraction in NIM to play out over time and fall from 9.4% in FY13 to 9% in FY15. We expect credit cost to hover at around 1.3-1.4% for FY15. We expect a loan growth of 29% for FY15, following a growth of 25% through FY13-14.

Valuation: The stock trades at a forward multiple of 2.4x standalone book and 13.2x rolling earnings. While valuation is seemingly rich, incremental positive news flow could help stabilise the valuation at around these levels. Our new target price for the stock is Rs930, as we roll forward our valuation to Q3FY14 and price in the QIP money. Our target price multiple is 2.2x standalone book and 12.2x rolling earnings.

Source : Equity Bulls

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