M&M Financial Services - Robust growth, higher credit costs; rich valuations; Hold - Anand Rathi

Tractor and used-vehicle-driven robust loan growth. M&M Financial Services' AUM rose 35.9% yoy (5.8% qoq) to Rs.295.4bn, fuelled by robust growth in M&M's auto/utility and passenger-car segments (both up 35% yoy). Disbursement growth in other segments such as tractors and cars was also healthy. Ahead, we expect a 25%+ CAGR in loan growth over FY13-15, driven by the strong parentage and diversified product mix.

Lower NIM, productivity improvement sustainable. Calculated NIM on AUM, at 9.6%, decreased 80bps yoy as the management had altered securitization-income-recognition policy from an accrual to a cash basis. We expect NIM to hold at a high 9%+ as management expects to hike yields, which could help offset a short-term hike in short-duration interest rates. On the greater control over costs, cost-to-assets in the quarter improved 43bps yoy, to 3.5%, despite a 9.8% yoy rise in the branch network. For FY15, we expect cost-assets to improve to 3.3%, from 3.7% in FY12.

Asset quality deteriorates, NPA coverage declines. In a seasonally weak quarter, GNPA jumped 51% qoq, while provision coverage slipped 973bps qoq to 56%. Better monsoons, according to management is likely to support higher recoveries during 2HFY14 . We conservatively build in higher credit costs of 1.5%+ over FY14-15 (1% in FY12), given the stress in the macro-economic situation and the increasing proportion of used vehicles.

Our take. On the marginally higher growth assumption, we raise our FY14/15 PAT estimates 1.5%/1.8% . We expect the company's niche rural presence, strong parentage and diversified product mix to support a 3.4%+ RoA over FY13-15. On the rich valuations, we downgrade the stock to a Hold. At our target, it would trade at PBV of 2.7x FY14e and 2.3x FY15e. Our valuation is based on the two-stage DDM (CoE: 15%; beta: 1.1; Rf: 8%) Risks. Higher NPA because of a slowdown in the rural economy.

Source : Equity Bulls

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