M&M Financial Services Ltd. - BUY (Target Rs290, Upside 26%) - YES Securities

In a weak macro environment, MMFS posted a commendable operating show with PPOP rising 8% qoq and 44% yoy. Key positive surprise was a substantial decline in opex. Lower disbursements (down 67% yoy) and collections (75% of customers under moratorium) suppressed large variable cost components like travelling, commissions and conveyance. Renegotiation of fixed costs (rentals, outsourced services, etc.) and reduction in discretionary costs (advertising, etc.) also pulled down the opex. On-roll manpower has been coming down as company is not replenishing attrition.

NII growth (8% yoy) continues to run behind AUM growth (14% yoy), largely reflecting built-up of liquidity on balance sheet and its consequent impact on the gross spreads. Cash/liquid inv. stood at Rs85bn+ (10% of total assets). MMFS made additional provisions of Rs4.8bn in stand-alone business and Rs1.9bn in housing finance subsidiary for covering contingencies that may arise from Covid. PCR on Stage-3 assets improved to 40% and even the cover on Stage 1 & 2 assets was marginally raised. The announced rights issue of Rs30.8bn will augment Tier-1 capital by ~500 bps. With a well-provisioned balance sheet, the capital raised will be largely utilized for growth and gaining market share when environment improves.

Upgrade Reco to BUY from ADD. Raise FY21/22 profit estimates by significantly cutting the opex. Largely retained credit cost estimates despite management commentary suggesting upside risk. Characteristic of being a rural proxy and a pro-cyclical franchise to drive faster normalization of return ratios. Raise 12m TP to Rs290 (unadjusted for rights).

Highlights

- In a weak macro environment, MMFS posted a commendable operating show with PPOP rising 8% qoq and 44% yoy. Key positive surprise was a substantial decline in opex, down 18% qoq and 38% yoy.

- Lower disbursements (VAF down 67% yoy) and collections (75% of customers under moratorium) directly suppressed large cost components like travelling, commissions and conveyance. Renegotiation of fixed costs (rentals, outsourced services, etc.) and reduction in discretionary costs (advertising, etc.) also pulled down the opex. On-roll manpower has been coming down as company is not replenishing attrition.

- NII growth (8% yoy) continues to run behind AUM growth (14% yoy), largely reflecting built-up of liquidity on balance sheet and its consequent impact on the gross spreads. Cash/liquid inv. stood at Rs85bn+ (10% of total assets)

- MMFS made additional provisions of Rs4.8bn in stand-alone business and Rs1.9bn in housing finance subsidiary for covering contingencies that may arise from Covid. PCR on Stage-3 assets improved to 40% and even the cover on Stage 1 & 2 assets was marginally raised.

- The announced rights issue of Rs30.8bn will augment Tier-1 capital by ~500 bps. With a well-provisioned balance sheet, the capital raised will be largely utilized for growth and gaining market share when environment improves.

Our View

- Upgrade Reco to BUY from ADD. Raise FY21/22 profit estimates by significantly cutting the opex. Largely retained credit cost estimates despite management commentary suggesting upside risk.

- Characteristic of being a rural proxy and a pro-cyclical franchise to drive faster normalization of return ratios. Raise 12m TP to Rs290 (unadjusted for rights).

Risk to our call

- Spread of Covid impacting growth and prov. estimates

Shares of MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD. was last trading in BSE at Rs.229.6 as compared to the previous close of Rs. 207.9. The total number of shares traded during the day was 11916742 in over 113712 trades.

The stock hit an intraday high of Rs. 233.65 and intraday low of 205.75. The net turnover during the day was Rs. 2657916792.

Source : Equity Bulls

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