Mahindra & Mahindra Financial Services (MMFS) is benefitting from buoyancy in rural cash flows and growth in construction/infra activity across the country. Trends in monsoon, rising competition and its impact on growth and profitability are monitorable. The new accounting norm will reduce cyclical volatility in earnings which is positive over the long-term. With all improvements priced-in, we retain our ‘reduce’ rating and revise target price to Rs 500 (from Rs 475 earlier).
MMFS reported PAT under IGAAP of Rs 1.93 billion as compared to our estimate of Rs 1.87 billion. We back calculated its P&L on IGAAP from its Ind-AS results and reconciliation thereof. As per IGAAP, NII increased 20% year-on-year to Rs 10.3 billion on the back of 21% loan growth to Rs 587 billion. Disbursements, driven by CVs and cars, were strong at 35% year-on-year. Provisions declined 18% year-on-year to Rs 3.5 billion. Stage 3 loans under Ind-AS (akin to GNPLs) declined impressively to 9.3% from 14.5% year-on-year.
MMFS is in for a strong year ahead. The company reported 35% growth in disbursements in Q1FY19; CVs (14% of AUMs) delivered 109% growth in disbursements. However, ex-CV disbursements were strong as well at 26% year-on-year. Moderation in CV sales on a high base and change in axle norms may lead to near-term weakness in this segment though we expect UVs, used vehicles and rural cars to pick up in H2FY19; our auto analysts expect 10% volumes growth in M&M’s UVs in FY2019E versus about 6% in FY2018. Trends in monsoon, a key monitorable, have been mixed in central and south; west India has seen favourable rainfall while east, north-east and parts of north India remain significantly deficient.
We believe that migration to Ind-AS will reduce the overall volatility in MMFS’s earnings as the new accounting norm prescribes higher standard asset provisions (stage 1 and 2); consequently, NPL provisions will be lower. As such, earnings will be less volatile than under IGAAP.
We estimate stage 1 and 2 provisions of MMFS at 2.4% in FY2019E and expect them to contribute 45% to total ECL (outstanding provisions on balance sheet).
Thus, while upcycle gains will be capped, the impact on earnings and profitability in a down cycle will be lower as well; this in turn will help management and stakeholders to focus on long-term structural growth over riding cycles.
We are revising up our estimates by 3-9% to align with the new norms and build in higher loan growth. Post our revisions, we expect the company to deliver 16-17% medium-term RoE and 24% earnings CAGR during FY2018-21E; we value the stock at Rs 500 i.e. 2.3X book FY2020E and add Rs 60/share for its stake in housing and insurance distribution business.