By HDFC Securities Institutional Research

Mahindra and Mahindra Financial Services (MMFS) reported an in-line operating performance, registering NII/PPOP growth of 13.2%/9.4% YoY, with higher-than-expected NII (largely due to lower cost of funds) and operating expenditure having off-setting impacts. Disbursements were muted (-15% YoY, -5%QoQ) (CV/CE yet to pick up) and are likely to remain muted in 1QFY22 as well. The company reported higher- than-expected credit costs (4.7%), shoring up its GS-III provisions to 58% (3QFY21: 37%), bringing down its NNPA to 4% (3QFY21: 6.6%) on the RBI’s advice. With likely muted pick up in disbursement and recovery amid a second pan-India Covid wave, we have revised our FY22/23E earnings estimates lower by 17.8/6.8%.

Relatively inexpensive valuations and MMFS’ parentage-enabled access to funds underpin our ‘add’ rating (revised TP of Rs 183) (implied valuation at 1.3x Mar’23 ABVPS).

Elevated provisioning shores up PCR to a healthy 58%. MMFS’s non-tax provisions remained elevated at Rs 8.9bn (4.4% of average AUM, annualised), ahead of our estimates. As per management, the elevated provisioning is in line with the regulator’s recommendation to bring NNPA below 4%. With ECL provisions now at 7.2% of AUM (GS-III PCR at 58%), we expect credit costs to moderate during FY22 (2.9%).

Stressed assets largely steady; second wave poses uncertainty. MMFS’s stressed asset pool (GS II + GS III) dipped during the quarter to ~21.5% of AUM (3QFY21: 24.1%), largely on account of write-offs (Rs 6.3billion), along with ~14% of the borrowers under moratorium (3QFY21: 16%) not making any payment since Sep’20. However, the second Covid wave poses risk to the pace of collections, with the rural segment also being impacted this time.

Disbursement pickup taking a bit longer. Despite a diversified portfolio, MMFS’s disbursals are still at ~56% of pre-Covid levels (Rs 60billion vs average of Rs 106 billlion in FY20), largely due to slowdown in CV/CE segment and lack of buoyancy in other segments. We build in an AUM CAGR of 10.7% over FY22-23E, likely to materialise only from H2FY22.