Analyst Corner: Maintain ‘buy’ on M&M Fin Services with TP of Rs 600

Mahindra & Mahindra Financial Services reported PAT of Rs 420 crore (5% miss). While net income was in line and provisions were lower than estimated (23% lower), higher one-time gratuity provisions and employee incentive cost led to the PAT miss.

Calculated NIM on AUM expanded 140bp q-o-q, led by yield expansion, as MMFS gained market share in used vehicles and non-M&M OEMs. b) Adj. AUM grew 19.5%/6.6% y-o-y/q-o-q (ahead of our estimate), marking sturdy growth after 12 straight quarters of range-bound growth (8-12%).

GNPA (on 90dpd) in absolute terms fell 22% q-o-q to Rs 4,700 crore, and PCR improved 280bp q-o-q to 58%. GNPA % declined 300bp q-o-q to 8.5%. According to management, over the next few quarters, OEMs will reduce discounts on vehicles, manifesting higher disbursements.

From the earlier range of 14-15%, AUM growth guidance is increased to 18-20%. Management also expects NIMs to be largely flattish-to-improving, and credit cost to come down to 1.8-2% by FY20 from 2.6% in FY18. Further, it targets to bring down GNPA % to 7% by H1FY19, despite a seasonally weak period.

The business environment for MMFS is getting better, with multiple tailwinds in each product class. Asset quality data signal early signs of revival. Recoveries and growth will drive a sharp increase in RoE from 10.5% in FY18 to 15%+ in FY20.

We have increased AUM growth estimate to 20% from 16%, and reduced credit cost to 2.2%/2.0% for FY19/20E, driving PAT upgrade of 8%/16% in FY19/20E. The company’s long-term prospects remain strong. Our SOTP-based target price is Rs 600.

Mahindra India