Remain ‘neutral’ on M&M Financial Services (MMFS) with target price of R290 per share, implying implies 2x Mar-17 book. We believe cyclical headwinds are still too strong to play for long-term growth opportunity.
While fundamentals will take six-nine months to recover, especially after the unseasonal rainfall, we believe valuations now look reasonable and we do not expect further de-rating. We will closely monitor the amount of asset quality stress from the recent unseasonal rains and the onset of normal monsoon to turn positive on the stock.
Unseasonal rainfall has hit 10-15% crops in the affected states. While it is too early to gauge the asset quality impact, it may have an impact on rural sentiment and some part of the slippage will likely reflect in Q1FY16f Affected states like Maharashtra, Gujarat, MP, UP, Rajasthan, Punjab and Haryana contribute 40% of MMFS’ branches, and possibly AUMs as well, and the impact of unseasonal rainfall will be meaningful.
Positive is that management is seeing pick-up in activity in a few states with Telangana and AP returning to investment mode, the UP state government starting to award projects and the power situation improving in Tamil Nadu.