Upgrade MMFS as asset quality to stay steady

Upgrade Mahindra & Mahindra Financial Services (MMFS)…

Upgrade Mahindra & Mahindra Financial Services (MMFS) to ‘buy’ with a target price of Rs 325 valuing the stock at 2.5x FY17e price-to-book value (P/Bv). MMFS was among the best performers in the last cycle, but the stock has delivered just 7% return over the last one year. It currently trades at 12.2x FY17e EPS and 2x FY17e P/Bv. Asset quality stabilisation, volume growth pick-up and margin expansion should drive earnings upgrades.

Macroeconomic sluggishness and weak farm activity/economic in key states led to asset quality pressures for MMFS. However, there are several trends indicating that NPLs are unlikely to worsen from current levels. We expect NPLs to remain in the range of 6-7% until H2FY16, and improve gradually thereafter.

MMFS enjoys one of the best rural-lending franchises among NBFCs in India. Its ‘close to customer’ business model has helped it to stay ahead of competition. It continues to strengthen its franchise by making further inroads into rural areas and expanding its OEM partnerships. MMFS has expanded its reach to over 1.8 lakh villages and has increased its branch network (both hub and spoke) by 65% since FY13. While its costs might go up in the short run, it will be better equipped to capitalize on the growth opportunity over the next 5-8 years.

Given the latent credit demand of $200 billion from this market, there is adequate scope for MMFS to achieve 20% CAGR over the next decade.

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