Mahindra Finance’s (MMFS) 3QFY16 performance was significantly weaker than expected, highlighting the extent of stress in parts of rural India. Tightening NPL recognition norms and deteriorating asset quality in these geographies will likely put pressure on near-term earnings even as some of the better-performing states drive growth. We cut estimates by 11-27% but remain cognizant about the deep cyclical nature of this business, which largely supports our ‘buy’ rating; target price of Rs 265 (down from Rs 300).
MMFS reported sharp rise in credit costs (3.5% of loans from 2.9% q-o-q and y-o-y). This was driven by further (12% q-o-q) rise in GNPLs to 10.1% of loans; this accounted for 65% of credit cost, and movement of NPLs to higher buckets driving 35% of credit costs. The rural economy remains weak due to multiple crop failures and limited non-farm commercial activities. We expect collections to pick up in 4QFY16 in line with seasonal trends. However, overall momentum will remain weak until we get clarity on CY2016 monsoon. A transition to more stringent NPL norms and aging in delinquent accounts will drive provisions.
In the conference call, MMFS’s management highlighted that the stress in their portfolio is concentrated in select states in the south and central parts of India, viz. Kerala, Karnataka, MP, Maharashtra, Tamil Nadu and also Assam. Most other large states such as AP, Punjab, Rajasthan and Telengana are doing well; these states have largely driven 18% disbursements growth in 3QFY16. While there is no visibility on macro improvement in the weaker states, the company will continue to grow in other regions.
