M&M Financial Services - Fails to surprise positively in (otherwise) seasonally strong quarter - ICICI Securities

We had expectations from M&M Financial Services (MMFS) of incremental signals on company treading a path towards normalisation. Especially, when Q4 is historically strong (seasonally), and peers reported lower stress and growth uptick. To our disappointment, i) stress pool (stage-2/3 assets) remained elevated at 21.5% (albeit down from 24%; not descending to our liking); ii) credit cost settled higher at 5.6% for Q4FY21/FY21 (with an endeavour to contain net stage-3 below 4%); and iii) disbursements were down 15% YoY in Q4FY21 and >40% in FY21 leading to 5% YoY contraction in AUM. The near-term outlook, too, is not encouraging with disruption due to covid resurgence likely to prolong phase towards normalisation. We believe valuations, in the interim, will be capped at 1.3x FY23E ABV making us revise our target price to Rs160 (earlier: Rs220) and downgrade it to REDUCE from Add. Key risks to our rating: Growth returning earlier than envisaged and above average monsoon supporting asset quality.

- Unwavering focus on collection, but stress is not descending to our liking: Historically, Q4 witnesses an improvement in asset quality with stage-3 assets upgrading on a net basis by ~20%. Also, on higher base (Q3FY21 stage-3 assets at 10% and stage-2 assets at 14%) and given the technical nature of slippages in Q3FY21 (90k accounts were regularly servicing; 15-20k accounts in tractor segment, where money had started flowing), efforts were channelised to bring down stage-3 by 20-25% from Q3FY21 level. While there was an improvement with stage-2 settling at 12.55% (150bps decline) and stage-3 at 8.96% (down 100bps), the descend from Q3FY21 levels was not much to our liking. Also, decline in asset base (denominator) made ratios look optically even higher. We expect stage-3 to continue near 9.5% in FY22E and then moderate to 8.2% by FY23E. Net stage-3 will still continue to remain near 4%.

- Collection efficiency improving MoM but customer doesn't seem to clear full overdues: With revival in activity levels and focus on recoveries, collection efficiency (including overdue accounts) has consistently improved MoM with 82%/84%/96%/94%/98%/109% for Oct '20 -Mar '21. This when correlated with stage- 2/3 numbers suggests customers are making payment (of either single or multiple EMIs) but not enough to clear their overdue installments, thereby, capping an upgrade into previous buckets. Around 3% customers have not paid any amount due in Q3FY21/Q4FY21.

- Restructuring not encouraged much but vulnerable segments flowing into stress pool: Even with further restructuring of another 262 contracts, the quantum of restructuring was negligible - Rs630mn (0.1% of business assets). Vulnerable segments such as cab aggregators, school bus, hotel / tourism, heavy CVs, etc. now seem to be sitting in stage-2/3 assets.

- Management overlay provisioning and write-offs lead to elevated credit cost: The company resetting ECL model and creating management overlay buffer to meet regulators net stage-3 expectations, has increased coverage on stage-3 assets to 58% vs 37% QoQ (31% YoY) and has also provided 11% on stage-2 assets. To contain net stage-3 sub-4%, it created additional overlay provisions of Rs12.5bn in Q4FY21 (Rs17.4bn in FY21). Over and above this, aggressive negotiations, termination and disposal of repossessed assets resulted in write-offs of Rs6.3bn in Q4FY21 (Rs21.7bn in FY21). This has more or less offset the write-back of Rs10bn in specific provisioning. Consequently, annualised credit cost in Q4FY21/FY21 was unusually higher at 5.5% (vs average of 2.0-3.0% over the past few years). The company is carrying cumulative management overlay provisions of Rs23.2bn (3.6% of business assets) and net stage-3 are sub-4% (compared to 5.5-6.5% in earlier years). It reflects adequacy of provisioning getting into future and some protection against volatility in earnings. We are, therefore, factoring in credit cost of 3.2%/2.6% for FY22/23E respectively.

- AUM (business assets) growth declined 5% YoY/3% QoQ; disbursements in FY21 down >40%: Incremental disbursals during the quarter stood at Rs60bn (down 15% YoY/5% QoQ) ending full year disbursements over 40% lower at Rs190bn. Despite strong presence in rural and semi-urban areas, it is not benefitting from buoyancy in activity level. It is consciously going slow in tractors (losing market share), supply side constraints have impacted UV sales and MHCV demand outside of large fleet operators is muted. Overall, business assets growth declined 5% YoY (down 3% QoQ) at Rs646bn. In terms of segmental disbursements, auto/utility vehicles, tractor finance and cars comprised 34%/18%/21% of FY21 disbursements, respectively.

Due to covid resurgence, states are going through some administrative controls disrupting the activity levels, movement and collections. In fact feedback from ground suggests employees/customers are more cautious than last year and Q1FY22 activity levels are expected to be subdued. Normalcy is, therefore, expected to set in from H2FY22 and we are building in AUM growth of 7%/15% for FY22/23E respectively.

- Strategic initiatives towards growth to gear up when opportunities return: The company is preparing itself for the upcoming opportunities through deep presence (added 142 branches in Q4FY21 itself), partnership/co-lending and strong dealer relationships. We expect demand for tractors, UVs, cars, etc. to normalise quicker than CVs/SMEs, which may lag for a while.

The company is also planning to diversify the product portfolio by nurturing new business of digital personal loans and 2-wheeler financing, to build a parallel balance sheet. There is identified need of its customer profile for small-ticket loans and initially it will tap its existing customer base with proven repayment track record. Providing loan when customers need the most through hassle free process and at their convenient/comfort with efficient cost of operations would be its right to win. The management has articulated a huge potential in this business over 3-5 years.

- Cost containment through more definite and sustainable savings: MMFS had shaved off almost 100bps cost (to assets) in 9MFY21, of which, 40-50bps seems definite and sustainable as rental, legal, BPO service, etc are revisited. However, with intensive efforts towards collections and branch addition, opex was up >20% QoQ. Cost to assets may retrace 30/50bps to support AUM growth, but will still be capped at sub-2.5%.

- Operating profit sustains benefitting from better spreads: Ability to tap newer borrowings from multiple sources, assignment in Q4FY21 and better liquidity management has helped sustain NIMs at superior levels of 7.7%. This is despite higher stress recognition in this fiscal. NII and net revenue grew 12% YoY/9% QoQ to Rs15.1bn and Rs15.5bn, respectively. Consequently, operating profit grew 9% YoY/4% QoQ to Rs10.6bn. Also to affect interest on interest waiver, Rs320mn of provisioning was made in Q4FY21.

- Mahindra Rural Housing Finance: This entity has reported PAT of Rs350mn in Q4FY21 and Rs1.5bn in FY21. Gross stage-3 declined to 13.2% (from 14.9% in Q3FY21). It has cumulative buffer of 1.3% (seems to have utilised Rs270mn buffer in Q4FY21). Loan disbursements in Q4FY21 were 2-3% higher than the previous year's level.

Shares of MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD. was last trading in BSE at Rs.178.85 as compared to the previous close of Rs. 174.85. The total number of shares traded during the day was 1544461 in over 10790 trades.

The stock hit an intraday high of Rs. 180.85 and intraday low of 171.55. The net turnover during the day was Rs. 274303064.

Source : Equity Bulls

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