Mahindra & Mahindra Financial Services - Longer path to recovery - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

MMFS reported an in-line operating performance, registering a NII/PPOP growth of 13.2%/9.4% YoY, with higher-than-expected NII (largely due to lower cost of funds) and operating expenditure having off-setting impacts. Disbursements were muted (-15% YoY, -5%QoQ) (CV/CE yet to pick up) and are likely to remain muted in 1QFY22 as well. The company reported higher- than-expected credit costs (4.7%), shoring up its GS-III provisions to 58% (3QFY21: 37%), bringing down its NNPA to 4% (3QFY21: 6.6%) on the RBI's advice. With likely muted pick up in disbursement and recovery amidst a second pan-India COVID wave, we have revised our FY22/23E earnings estimates lower by 17.8/6.8%. Relatively inexpensive valuations and MMFS' parentage-enabled access to funds underpin our ADD rating (revised TP of INR183) (implied valuation at 1.3x Mar'23 ABVPS).

Elevated provisioning shores up PCR to a healthy 58%: MMFS's non-tax provisions remained elevated at INR8.9bn (4.4% of average AUM, annualized), ahead of our estimates. As per management, the elevated provisioning is in line with the regulator's recommendation to bring NNPA below 4%. With ECL provisions now at 7.2% of AUM (GS-III PCR at 58%), we expect credit costs to moderate during FY22 (2.9%).

Stressed assets largely steady; second wave poses uncertainty: MMFS's stressed asset pool (GS II + GS III) dipped during the quarter to ~21.5% of AUM (3QFY21: 24.1%), largely on account of write-offs (INR6.3bn), along with ~14% of the borrowers under moratorium (3QFY21: 16%) not making any payment since Sep'20. However, the second COVID wave poses risk to the pace of collections, with the rural segment also being impacted this time.

Disbursement pick up taking a bit longer: Despite a diversified portfolio, MMFS's disbursals are still at ~56% of pre-COVID levels (INR60bn vs average of INR106bn in FY20), largely due to slowdown in CV/CE segment and lack of buoyancy in other segments. We build in an AUM CAGR of 10.7% over FY22-23E, likely to materialise only from H2FY22.

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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