Buy Mahindra Financial Services - Motilal Oswal

Mahindra Financial Services (MMFS IN; Mkt Cap USD1.5b, CMP Rs705, Buy)

Loans grew 46% YoY (up 11.5% QoQ) to Rs115b. AUM grew 39% YoY and 10% QoQ to Rs134b.

Rise in lending rates (100bp hike in 3Q) and increasing mix of high yielding assets kept gross spreads (reported) at an elevated level of 11.7% (11.5% in 2Q).

Asset quality has shown consistent improvement over the last 5-6 quarters and has resulted in provisioning cost declining.

MMFSL has got the approval to raise ~Rs5.5b through fresh equity issuance. We have not yet factored any equity issuance in our estimates.

Robust outlook for rural India would lead to healthy business growth for MMFSL. Hike in lending rates and well-matched asset-liability duration would help offset the impact of rising cost of funds. We expect FY11 EPS of Rs48 and BV of Rs207, and FY12 EPS of Rs59 and BV of Rs254. We expect strong ROAs (on AUM) at 3.2-3.4% and RoEs at ~24%. The stock trades at P/BV of 2.8x FY12E. Maintain Buy with target price of Rs765 (3x FY12E BV).

Source : Equity Bulls

Keywords