Mahindra & Mahindra Financial Services Ltd. share price target

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.

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).

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%.