Strong business momentum led by rural cash flow, high NIM For MMFS, AUM has grown at 23% CAGR with volatile spells in FY09-18. AUM grew at 32% CAGR in 09-14, slowed down in FY15-17 to 10% and then revived to 16% in FY16-18 to | 55,100 crore. We expect AUM to grow at 20% CAGR in FY19-21E to | 94,996 crore. Robust infrastructure spends and recent farmer friendly schemes are expected to support rural cash flows. Current NIM at ~8% is expected to remain stable over the next two years as it has already moderated from highs of 9.2% in the past....

In spite of a challenging environment and tight liquidity, asset quality improved by write-offs and seasonal improvement. Gross and Net non-performing asset (NPA) ratios (stage 3) improved by 130 bps and 20 bps sequentially in Q3FY19 to 7.7% and 5.8%, respectively. Importantly, the number of NPLs contracts declined QoQ, implying improvement in the underlying trend. However, higher write-offs led to decline (800 bps QoQ) in provision coverage ratio (PCR) to 26.9%. Going forward, we expect rural cash flow to improve with increased government focus on rural initiatives, hence, collections will improve further. Thus, we project Gross/Net NPA ratios...

Maintain BUY with an SOTP of Rs 498 (2.75x Dec-20 ABV of Rs 174.5 + Rs 18 for MIBL). MMFS robust disbursal (+24/22%) and AUM (+31/6%) growth sustained. Asset quality improved as Gross/Net Stage III dipped further, by ~130/20bps to ~7.7/5.8% (in part, optical, due to higher w/os at ~Rs 9.85bn i.e. 17% of Op. Gross Stage III). Calc. NIMs were sequentially flat at ~7.9%. Notably, MMFS continues to expand its reach (added 17 branches in 3Q and 135 in the last 12 months).

MMFS reported PAT of INR3.2b (14% miss), driven by higher-than- expected opex and tax rate. Adjusted for INR500m profit on MIBL stake sale in 3QFY18, PAT declined by 8% YoY. AUM and disbursements remained on a robust growth trajectory. grew 6% QoQ (+30% YoY) to INR631b. MMFS maintained spreads on a sequential basis at 6.9%, despite a 26bp sequential increase in cost of funds to 8.76%. Total provisions as a percentage of loans stood at 1.9% v/s 3.0% a quarter ago and 4.1% a year ago. PCR including standard assets provisions declined QoQ by 1,000bp to ~49%. This was largely due to write-off of INR9.85b during the quarter.

Net interest income (NII) grew at a robust pace of 28% YoY (in line with our expectation) supported by 35 bps expansion in net interest margin (NIM) to 7.8% in Q2FY19. NIM improved as improving asset quality helped the company to outweigh rise in cost of funds. Cost to income (C/I) ratio declined by 453 bps YoY to 35.1% as operating efficiency kicked in. As a result, pre-provisioning profit increased at a faster pace of 38% YoY. Net profit jumped by 4.9x YoY mainly due to low base of Q2FY18. Going forward, we expect net profit to increase at a CAGR of 35% over FY18-20E on the back of improving NIM (~8.2%) and declining provisioning expenses....

Maintain BUY with SOTP of Rs 487 (2.75x Sept-20 ABV of Rs 171 + Rs 18 for MIBL). MMFS superior performance across parameters yet again, was astonishing. Multi-qtr high broad based disbursals growth (43%) drove an AUM growth of 26%. Asset quality improved as gross/net stage III was lower by 40/30bps QoQ to 9/6% even as provisions dipped sequentially. Calc. NIMs expanded 30bps to 7.9% with better asset quality and slower rise in CoF. This lead to a 33% beat to our net earnings estimates.

MMFS reported PAT of INR3.8b (up ~1.5x YoY) under Ind-AS. The quarter was marked by robust disbursement and AUM growth, and an improvement in margins. Consequently, reported AUM grew 6% QoQ (+27% YoY) to INR595b. Over the past year, the share of Auto/UV declined from 28% to 25%, the impact of which was offset by an increase in the share of SME financing (12% to 14%). Calculated NIM on AUM expanded 130bp YoY to 8.4%, driven largely by a higher yield on loans (driven by product mix and general yield hikes), despite an increase in cost of funds. Total provisions as a percentage of loans stood at 3.0% v/s 3.1% a quarter ago and 4.3% a year ago. PCR including standard assets provisions was largely stable QoQ at ~59%. Management commented that it is presently borrowing from every possible source. However, it is keeping a close watch on the evolving liquidity situation.

Beating earnings estimates, MMFS recorded 132.5% YoY/41.7% QoQ growth in PAT at Rs 3.8bn (PLe: Rs 2.7bn) on the back of sharp rise in other income and lower provisioning led by meaningful improvement in asset quality. Higher dividend income from subsidiaries (Rs 200mn) and investment gains coupled with robust AUM growth of 26% YoY led to healthy operating profit growth (65.9% YoY/11.5% QoQ). While margins (calculated) uptick stood higher at 7.9% (up 37bps QoQ), the same should marginally soften on account of absorption of funding pressures but (expected to stabilize at 7.6% NIMs for...

Look beyond the rates; significant improvement in profitability ahead Key takeaways from our meeting with Mahindra Finance (MMFS) management: i) Disbursement growth remains strong for July/August at c.30%. Management expects 20%+ AUM growth in FY19 (vs. 18% in FY18) which could accelerate to 25% in FY20 ii) Asset quality is significantly improving and company has witnessed 5% improvement in collection efficiency during July/August; Management expects GNPL to reduce to 7% by FY19 (vs. 9.4% in Q1) iii) MMFS expects 15bps increase in average outstanding cost of funds (incremental cost of funds up 75bps) which will be passed on via higher lending rate; iv) NPLs...

Maintain BUY with a TP of Rs 590 (3.5x Mar-20 ABV of Rs 163 + Rs 18 for MIBL). The pullback in asset quality sustained as MMFS reported a sizable reduction in the gross stage III NPAs (9.4% vs. 14.5% YoY). The usual 1Q hiccup was also curbed as sequential stress accretion was lower than previous years (270/150bps in FY17/18). The spike is credit cost is primarily due to higher provisioning on stage I and II under the ECL methodology as per IND AS.

Operating Income fell by 6.51% to Rs. 1925.84 Cr in Q1FY19 when compared to the previous quarter. Mahindra & Mahindra Financial Services Ltd Q1FY19 results Comment

Asset quality surprised positively even though the company transitioned to 90 days past due (dpd) NPA recognition norm in Q4FY18 from 120 dpd in Q4FY17. Gross non-performing asset (NPA) ratio declined by 50 bps YoY (310 bps QoQ) to 8.5% on account of strong recovery and improvement in rural cash flows. However, Net NPA ratio increased by 20 bps YoY (180 bps QoQ) to 3.8%. Going forward, we expect positive rural sentiment and healthy farm cash flows to sustain led by normal monsoon. Thus, collections are expected to improve further. Hence, we...

Operating Income grew by 14.41% to Rs. 2497.01 Cr in Q4FY18 when compared to the previous quarter. Mahindra & Mahindra Financial Services Ltd Q4FY18 results Comment

Maintain BUY with a TP of Rs 590 (3.5x Mar-20 ABV of Rs 164 + Rs 18 for MIBL). An eye-catching recovery in asset quality (G/NNPAs down 310/180bps QoQ) and renewed growth traction (18% YoY) capped a remarkable quarter for MMFS. The downtrend in provisions (-56/21% YoY/QoQ) and uptick in NIMs (+15/134bps YoY/QoQ) led to a net earnings jump (+81% YoY).

Operational miss was from lower income from yield pressure despite better than expected AUM growth of~18% YoYand on higheropex due to oneoff expenses. Managementremainsoptimisticonimprovingruralcashflowandimprovinginfra activity which should lead to growth of 1820% in FY19 across segments and will lower provisioning requirement. Rural recovery should agur well for growth and recoveryfromNPAscanbringtailwindtoearningshelpingdeliverROAof2.62.8% byFY20.WeretainAccumulatewithrevisedTPofRs553(upfromRs530)basedon...

We retain Sell on MMFS with TP revised upwards to Rs380 (valued at 2.5x FY20E ABV). Our channel checks had pointed for strong disbursement growth and incidences of lower repossessions / higher recoveries for the quarter. Q4'18 results corroborated our survey that saw a) solid 17.8% YoY growth in AuM and b) sharp 22% QoQ decline in GNPA. Commentaries on growth, asset quality remain encouraging. Even as we factor in higher growth rates (we have our reservations here) and improved asset quality, FY20E RoE will still be lower to its 10-year average RoE, also when compared to its peers. Valuations at 3.4x FY20E ABV are on the higher end of the band. Retain SELL....

MMFS reported PAT of INR4.2b (5% miss). While net income was in line and provisions were lower than estimated (23% lower), higher one-time gratuity provisions and employee incentive cost led to the PAT miss. Key positives: a) Calculated NIM on AUM expanded 140bp QoQ, led by yield expansion, as MMFS gained market share in used vehicles and non-M&M OEMs. b) Adj. AUM grew 19.5%/6.6% YoY/QoQ (ahead of our estimate), marking sturdy growth after 12 straight quarters of range-bound growth (8-12%).c) GNPA (on 90dpd) in absolute terms fell 22% QoQ to INR47.0b, and PCR improved 280bp QoQ to 58%. GNPA % declined 300bp QoQ to 8.5%.

Mahindra Finance (MMFS) has showcased healthy performance, much on expected lines, with AUM growth of ~17.8% yoy to Rs551bn whereas PAT grew by ~81.4% yoy to Rs4.24bn led by sharp decline in credit costs Interestingly, AUM mix for the company is inclining towards newer lending segments like used vehicle/SME loans/CVs instead of its traditional products like UVs/tractors...

Maintain BUY with a TP of Rs 531 (3.5x Dec-19 ABV of Rs 146 + Rs 18 for MIBL). MMFS relentless efforts on collection coupled with cautious approach on growth has led to a step up across parameters. Asset quality improved as G/NNPAs 90bps sequentially even as provisions halved (156bps vs 364bps QoQ).

MMFS reported PAT (adjusted for stake sale gain) of INR2.9b, exceeding our estimate by 17%, driven by net income beat of 6% (helped by lower cost of funds) and lower provisions (INR2b v/s estimate of INR2.2b). During the quarter, the company recorded one-off gains of INR650m (INR500m post tax) on sale of stake in one of the subsidiaries. PAT including stake sale wasINR3.42b. The gain was not factored in our estimates. AUM grew 13.5%/3.7% YoY/QoQ (in-line), registering sixth straight quarter of 13-14% AUM growth. With the base becoming favorable, we expect AUM growth of 16-17% in 4QFY18. Growth was driven primarily by tractors, CV and CE (+13% YoY), and SME (+1.3x YoY). On a sequential basis, CV/CE(+12%), Tractors (+10%) and Cars (+8%) were the key drivers.