Q3FY15 earnings came in at R136 crore, down 17% y-o-y and 21% below our estimates due to worsening asset quality. Disbursements continued to decline (-8% y-o-y in Q3) with AUM growth moderating to 11% y-o-y. The CV book continued to shrink.
Management attributed the challenging business environment to, weakness in rural economy, higher supply in the marketplace and higher discounts on vehicles, continuing CV cycle weakness, below average monsoon, and no major increase in support prices.
GNPLs increased further to 7.1% versus 4.4% in Q4FY14 and was up 80 bps q-o-q. Despite this, NIM remained stable at 8.9%.
We expect stress to continue in FY16e, while FY17e could be better as the economy improves. However, as the stringent NPL recognition kicks in from FY17 for MMFS, provisioning should continue to remain high. We therefore lower our earnings by 12%/10% for FY16e and FY17e, and expect RoA to stabilise at 2.6-2.7% levels versus 3%+ levels in recent years.
Given the longer-than-expected recovery cycle and consequent decline in profitability over FY16-17e, we now value the stock at 2.0x 12-month forward AB (January 2017 base), leading to revised target price of R216. Upside risks are faster improvement in rural economy, and quicker-than-anticipated asset quality revival.
HSBC