BUY on Mahindra & Mahindra Financial Services - Remains an inexpensive rural play - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

MMFS' 2Q earnings were slightly ahead of estimates. Despite the uptick in collection efficiency (~82% in September), we continue to build a sharp rise in GNPAs to 10.1% in FY21E. We have revised our AUM growth estimates upwards, to adjust for current AUM growth trends and management commentary; we model a slight improvement in operating efficiency. These drive our earnings estimates. MMFS' recent capital raise and ability to borrow with relative ease are pertinent positives that set it apart from most NBFCs. We maintain BUY with a target price of Rs 175.

2QFY21 highlights: Operating profits at Rs 10.3bn (+25.9/-1.3% YoY/QoQ) were slightly ahead of our estimates while net earnings at ~Rs 3bn (+20.6/94.8%) were ~7% ahead of estimates.

Portfolio growth: AUM growth expectedly slowed, reaching 12.3/0.3% YoY/QoQ. Disbursals rebounded sequentially (+54.7%) but were 44.6% lower YoY. The management expects disbursals in 2HFY21 to remain flattish YoY, due to the relatively low impact of COVID-19 in upcountry locations and a good monsoon season. Consequently, it guided for loan growth of 8- 10% in FY21E. We have revised our growth estimates upwards to 5% in FY21E and 12% over FY22-23E.

Funding and liquidity: MMFS' CRAR, at 25.1% (including Tier 1 at 20.8%), was bolstered by its recent rights issue. Consequently, as business growth remained muted, borrowings dipped 4.6% QoQ (+6.6% YoY). The management indicated that MMFS held liquid assets (including some portion of investments) of ~Rs 85bn, and the excess liquidity exerted a 50- 60bps NIM drag. MMFS intends to reduce liquidity buffers to ~Rs 40-50bn.

Asset quality and provisioning: GS III dipped 87/216bps to ~7% on account (1) high write-offs (~Rs 9.3bn), (2) the recent SC order. GS II too was ~7.9%. Collection efficiency improved to ~82% in September (73% in October so far). ~17.2% of MMFS' customers had not paid a single instalment. While the management does not expect GNPAs to rise further, we build in GNPAs of 10% by FY21E and credit costs of ~3% over FY21-23E.

Shares of MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD. was last trading in BSE at Rs.121.35 as compared to the previous close of Rs. 125.65. The total number of shares traded during the day was 1028860 in over 13792 trades.

The stock hit an intraday high of Rs. 126.4 and intraday low of 120.25. The net turnover during the day was Rs. 126825981.

Source : Equity Bulls

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