M&M Financial Services Limited - Q4FY21 Result Update - YES Securities

Sustained growth challenges; asset quality in-line

Mahindra Finance's Q4 FY21 disappointed on further growth deceleration and higher provisioning. The loan assets contracted by 3% qoq, and stood 5% lower yoy. Q4 FY21 disbursements were down 5% qoq and 15% yoy, reflecting sustained growth challenges for the company (unlikely to be the case with Chola or SHTF) on the back of constrained vehicle supply from OEMs (particularly M&M's Auto/UV). The growth trajectory is unlikely to improve in the near term, with the widespread second pandemic wave impacting demand and operations.

Asset quality improvement was largely in-line with our expectation and seasonality. There was a correction of 12-15% in both Stage 2 and Stage 3 assets during Q4 FY21, with the collection efficiency materially improving through the quarter. Credit cost/provisioning was much higher than anticipated, even as Stage 1 & 2 provisions were brought down on ECL refresh, with MMFS choosing to bring down Net Stage-3/NPL below 4% (in-line with RBI's expectation) by making an additional (one-time) provision of Rs.13.2bn.

Considering undemanding valuation at 1.3x FY23 P/ABV and inherent procyclicality of the franchise, we retain BUY on MMFS with a 12-month PT of Rs225. However, given growth challenges of recent quarters and a track-record of inconsistent execution, one would prefer Chola and SHTF over MMFS.

Conference call highlights

- Disbursement impacted by OEM issue, especially in UV segment (lower M&M volumes in focused products) - there has been some increase in competition from new players.

- Co. has taken an aggressive stance in customer engagement and repossession - also chose to make a provision in certain NPL buckets and then pursue collections - also made additional provisions.

- Wanted to increase Stage-3 provisions as pandemic return has been widespread and in rural parts - now provisioning reflects the worst scenario from resolution perspective - Stage-3 assets coverage at near 60% v/s ECL model output of 33-35%.

- Drop in Stage 1 & 2 provisions to 2% of business assets due to refresh of ECL model and reduction in Stage-2 assets qoq.

- Q1 FY22 will be a subdued quarter and business activity even in and H1 will be low - festival season will be strong.

- AQ improvement will happen in H2 FY22 - MMFS will maintain Net NLs at <4% - collection efforts and provisioning policy will be drive by this.

- Liquidity position comfortable to handle a 3-month exigency.

- Buoyancy in MHCV segment driven by fleet operators adding capacity, and not in smaller operators which is MMFS operating segment.

- Set-up of digital fin co. to meet small ticket finance needs (for personal and business reasons) of existing customers with strong credit track-record - offering loans at right time and only when the existing loan has run down, thus not increasing overall exposure - product will have low cost of operation and collection and will be headed by its COO - this portfolio can reach disbursements of Rs150-200bn annually - demand and number of customers not a dearth.

Shares of MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD. was last trading in BSE at Rs.163.2 as compared to the previous close of Rs. 178.85. The total number of shares traded during the day was 1794861 in over 14065 trades.

The stock hit an intraday high of Rs. 170.1 and intraday low of 161.25. The net turnover during the day was Rs. 293940731.

Source : Equity Bulls

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