Q4FY16 surprised positively with 2% drop in NPAs leading to a +40% PAT beat. Improvement in collections was driven by not only a marginal pick-up in a few states but lagging collections from Q3FY16. A good monsoon implies stability in asset quality going forward but valuations have also moved up (now just 10% below their long term average – 1.8x Mar18 book).
Mahindra & Mahindra Financial Services (MMFS) has traded at 2.5x book multiple in the past but we do not expect that significant a turnaround (FY10-14 rural wage growth of 20% CAGR and MMFS book CAGR of 25%) and hence we think 2.5x book multiples is unlikely. We thus maintain our ‘neutral’ rating with a revised target peice of R 310/share.
MMFS gross NPAs fell from Rs 40 billion to Rs 32 billion combined with transition from 135 to 120 day NPA recognition.
Recovery in a few weak states like TN/AP aided asset quality in Q4FY16 but the largest improvement was driven by lagged collections from Q3FY16. On a more comparable semi-annual comparison of 2HFY16, PPOP was flat and PAT was down 7% y-o-y.