Mahindra & Mahindra Financial Services Ltd. share price target

Improvement in asset quality was the key positive in the quarter. This was also reflected in volume terms, with the number of NPL contracts down ~30% QoQ. However, MMFS lowered its PCR on Stage 3 GNPLs to 19% from 27% in the prior quarter, which Over the past six quarters, MMFS has witnessed a significant improvement on most parameters AUM growth, margins and asset quality. The company has been gaining market share across all existing products and has expanded into newer products like pre-owned vehicles and CV/CE. NPLs have declined to a multi-quarter low. With strong AUM growth, improved branch productivity and low credit costs, MMFS is likely to maintain 2.5% RoA/16% RoE over the medium term, in our view. Value of assets financed for SMEs declined sharply from INR18b to INR1b, while that in vehicle finance increased 16% YoY to INR116b.

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.

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.