Maintain ‘neutral’ on Mahindra & Mahindra Financial Services (MMFS) and raise target price to R 300 from R250, mainly due to the rollover to Sept-16. Our target implies 2.2x Sep-16 book of R125. We believe cyclical headwinds are still too strong to play for long-term growth opportunity. Structurally, MMFS can deliver faster-than-system growth due to its rural positioning but we believe near-term headwinds are just too high to play for the long-term growth story.
However, we see no material recovery in sight yet. Near-term growth/earnings (H2FY15e) will likely disappoint in spite of a favorable rate cycle. We cut our near-term growth estimates, but raise NIMs for FY16f, and hence, we lower our earnings by only 2%. The current valuation at 2.35x Sept-16 book is demanding in the context of the slower-than-expected pick-up in growth/asset quality. Longer-term rural growth opportunity and a favourable rate cycle restrict us from a downgrade.
Overall rural buoyancy remains muted and our interaction with management indicates that post-festive demand/collections have been weaker than initially expected. While valuations have come off in the past 9 months, we think near-term earnings will likely disappoint.
On the asset quality front, the worst is behind and we do not expect slippages to inch up in H2FY15f but the seasonal pick-up in recoveries will be less pronounced
Nomura
