Mahindra & Mahindra Financial Services - Keeping the faith - Religare

MMFS reported a sharp 70bps increase in GNPLs during Q3FY14 led by the M&HCV portfolio and recovery issues in some markets. While management expects asset quality stress to continue for a few more quarters, stringent focus on recoveries should offset the potential impact. Disbursement growth is likely to slow down in the near term, though loan growth may remain strong as per management. With stable ROEs (~20%), valuations at 2.6x FY15 BV remain attractive. Maintain BUY.

- Asset quality stress unlikely to ebb in the near term: Management expects the stress in MMFS's asset quality to continue for a couple of more quarters. While stringent focus on recoveries would push down Q4FY14 GNPLs by ~25bps-30bps, the strong recovery trend historically seen for the company during Q4 may be elusive during the quarter.

- M&HCV segment a significant contributor to NPLs: The contribution of M&HCV segment to incremental NPLs remains high at ~40%. Historically, while tractors have been driving the company's NPLs, the cycle has reversed with the segment's asset quality emerging as the best in the portfolio.

- Focus on recoveries may soften near-term disbursement growth: Given the stringent focus on recoveries, growth in disbursements is likely to moderate in the near term. Management expects flat disbursement growth in Q4FY14, while loan book growth should remain stable at +25%.

- Maintain BUY: We expect flattish PAT growth in FY14 due to higher credit costs, but FY15 PAT growth to revive to 30% YoY. The stock has underperformed the Bankex by 17% over the past 3 months on asset quality concerns, but focus on recoveries should offset the potential impact. Valuations at 2.6x FY15 BV remain attractive. Maintain BUY.

Source : Equity Bulls

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