Maintain BUY on Mahindra & Mahindra Financial Services - Pain inevitable, valuations attractive - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

Mahindra & Mahindra Financial Services (Q4FY20): Pain inevitable, valuations attractive. Maintain BUY
(TP Rs 228, CMP Rs 168, MCap Rs 104bn)

MMFS' business and asset quality performance, and consequently earnings were hit by COVID-19, despite 4Q being a seasonally strong qtr. Operating performance is likely to be subdued in the near term. Elevated provisions are likely to persist, weighing down on earnings. A deep rural presence, capable collection infrastructure (as seen in the past) and relatively easy access to funds are positives. Inexpensive valuations underpin our BUY (TP of Rs 228, 1.4xFY22E ABV + Rs 18 for stake in MIBL)

Asset quality: 4QFY20 performance was a departure from usual trends - GNPAs (8.4%) were flat QoQ (+41.5% YoY) vs. the sharp improvement usually seen in 4Q. For perspective, between FY09 and FY20, GNPAs dipped ~19% QoQ in 4Q. This suggests that (1) the lockdown severely impacted collection efforts, and that (2) these efforts are highly concentrated to the end of the qtr (as suggested by our on-ground checks as well). GNPAs would've been ~150bp lower under normal circumstances, per the mgt. We expect asset quality to worsen as 75% of MMFS' book is under moratorium despite its rural focus. We expect GNPAs of ~10.4% by FY21E.

Liquidity and borrowings: Borrowings grew 15.3/1.1% to Rs 596bn and liquid assets were ~Rs 45bn (~6% of AUMs). MMFS is unlikely to face troubles on this front, as suggested by (1) historical trends (ability to raise ample funds post Sep-18 due to strong parentage), (2) recent fund-raising activities (~Rs 30bn raised in the last few months, ~Rs 6.8bn under TLTRO), (3) additional disclosures on the liquidity profile (however, underlying collection assumptions are unclear). MMFS did not avail moratorium on its bank borrowings, even as 75% of its own borrowers did. This was on a/c of the opportunity to substitute higher cost borrowings and maintain its repayment track record.

COVID-19 related management commentary: 75% of MMFS' borrowers (by number and value) opted for the moratorium but fewer farmers (amongst its borrowers) did so. 28-30% of borrowers (by value) are located in red zones. The co. saw collections improve in May (so far 2x of Apr-20 collections). 500 (~38% of overall) branches were open. The management was upbeat on farm cashflows and said that tractor demand was witnessing some revival. Split of customer profile- (1) taxi and cab operators (~11%), (2) farming (~25%), (3) self-employed incl. traders (~17%).

Shares of MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD. was last trading in BSE at Rs.168.4 as compared to the previous close of Rs. 168.4. The total number of shares traded during the day was 310495 in over 3918 trades.

The stock hit an intraday high of Rs. 171.15 and intraday low of 165.2. The net turnover during the day was Rs. 52214757.

Source : Equity Bulls

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