Jefferies: Mahindra Finance target price raised to Rs 365

By: | Published: July 27, 2016 6:04 AM

Q1 results disappointed, but it mainly reflects rural stress prevailing before monsoon. Also Q1 accounted for only 14-19% of profit in FY15-16. With monsoon progressing on track, visibility around a potential recovery in rural demand and asset quality in 2H is improving, in our view.

MahindraCumulative monsoon till July 20th is line with long term avg. Rainfall distribution has been widespread. (Reuters)

Q1 results disappointed, but it mainly reflects rural stress prevailing before monsoon. Also Q1 accounted for only 14-19% of profit in FY15-16. With monsoon progressing on track, visibility around a potential recovery in rural demand and asset quality in 2H is improving, in our view. NIMs could expand and credit costs could surprise positively. We lift our FY17-18E EPS by 5-7% and PT to `365 factoring better loan growth, lower credit costs.

Cumulative monsoon till July 20th is line with long term avg. Rainfall distribution has been widespread. Rural credit demand in April, May was poor, but MMFS is seeing pick up in tractor segment June onwards. We believe rural cash flows and demand should improve Q3 onwards as benefits of potentially normal monsoon starts coming thru. We raise our FY17-18E AUM estimates by 0.7%-1.2%. We forecast loan to grow 13.2%YoY in FY17E and 15% y-o-y in FY18E.

Increase in mix of lower yielding CV segment loans affected average yield in June quarter negatively. However, demand for higher yield segments (tractors, UV), may improve due to potential rural recovery. This could lead to better yields. Borrowing cost could ease due to lower interest rates (spot bond yields -26 bps vs. Q1 avg.).

MMFS’ credit cost has been highly cyclical (1.1-3% over FY12-16E) in the past.

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