Mahindra & Mahindra Financial Services’ Q4FY17 PAT at Rs 2.3 bn came lower than estimate on higher provisions. Though GNPLs are optically lower at 9%—a seasonal trend, this quarter it was more to do with higher write-offs. Even recovery rate in over 24 months overdue NPLs wherein company took credit benefit of Rs 1.9 bn in Q1FY17 has been lower and thus benefit had to be partially reversed (provisions of `1 bn, implying sub 10% recovery rate). Further, one-third of accounts which availed RBI dispensation slipped into NPLs. Meanwhile, sustained growth momentum supported healthy revenue—the only silver lining.
It is perplexing that the stock, wherein earnings trajectory has been weak with series of downgrades during down cycle, still retains premium valuations. MMFS’ consequent vulnerability keeps us guarded; moreover, valuations at 3.2x FY19E P/ABV capture near-term cyclical uptick. Hence, maintain Hold.
Asset quality continues to be soft
Volatile asset quality has been a major concern for MMFS. Optically, GNPLs were restricted to Rs 41.8 bn.
However, this was more on account of higher write-offs post repossession. For full year FY17, slippages run-rate was elevated at 5%. While post demonetisation we have seen relatively swift recovery, its sustenance is vital. Further, technically transitioning from the 120 dpd to 90 dpd norm will keep GNPLs at >10%, which in turn will keep credit cost elevated; we are building the same in FY18.
Outlook and valuations: Weak earnings; maintain ‘HOLD’
Though we repose faith in MMFS’ business model—strong brand, business relationships, geographical depth and product diversification—high contingency rural cash flow and consequent vulnerability keeps us guarded. We expect transition to keep credit cost higher, thus leading to >50% earnings CAGR over FY17-19e, leading to RoE of 14%. The stock trades at 3.2x FY19eE P/ABV. We maintain ‘HOLD/SU’ with TP of Rs 320.
Growth momentum sustained
MMFS’ growth momentum was sustained during the quarter, with disbursements coming in at Rs 84 bn. The disbursements surge was led by tractor and commercial vehicle/construction equipment segments, both of which registered growth rates in excess of 30%. Consequently, AUM jumped >14% y-o-y to `468 bn. The spurt was on account of improved sentiments post demonetisation, with management highlighting that most states have clocked swift recovery. In terms of asset class break-up, auto/utility vehicles continued to constitute major chunk at 30%, followed by cars (23%), tractors (17%) and commercial vehicles/construction equipment (13%). Pre-owned vehicles constitute 9% of overall book. We believe MMFS will continue to be the first choice of manufacturers looking to penetrate rural markets, leading to sustained growth traction going forward.