Asset quality headwinds baked-in; cyclical earnings recovery to ensue from FY22 - Retain BUY with 12m PT of Rs175
We almost retain earnings estimates for FY21/22 and reiterate our positive stance on MMFS. While significant stock of Stage-2/potential restructuring pool (7-8%) has driven some increase in credit cost expectations, the sustained control on cost mitigates this impact at the earnings level. Given procyclicality of the franchise, significant management overlay on ECL provisions, healthy capitalization post rights issue, worst of growth, credit cost & liquidity conditions behind, we estimate earnings and return ratios to bounce back strongly from FY22. Despite embedding much higher than regulatory provisioning on the potential restructuring pool, we expect MMFS to deliver average RoA of 2.2-2.3% over FY21-22. Current low valuation at 1x FY22 P/ABV, while adequately factors near-term concerns/uncertainty, fails to capture a palpable sharp recovery in growth and profitability from the next fiscal.
Strong operating performance
- An in-line quarter with strong PPOP growth of 26% yoy, underpinned by AUM growth of 12% yoy (flat qoq), NII growth of 8% yoy (depressed by excess liquidity carried) and controlled opex (down 24% yoy on structural initiatives).
- Gross Stage-3 exposure (GNPL) on reported basis declines 23% qoq to stand at lower 7%. The pool of SC order benefitted accounts was not large at 0.5% of loan assets, and MMFS has made and carries a 45% provisions on them. On reported stage-3, the cover was maintained at 35%.
- MMFS also raised cover on Stage 1 & 2 assets to 2.3% (adjusted for quantum of SC order related pool and provisions on it) by making additional provisions based on management overlay.
- Value of assets financed (disbursements) during Q2 was 55% higher than Q1 FY21, however still lower 45% on yoy basis. Business traction in Auto/UV, Tractors and Cars exhibited strong recovery on sequential basis.
Shares of MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD. was last trading in BSE at Rs.125.65 as compared to the previous close of Rs. 130.85. The total number of shares traded during the day was 901801 in over 8806 trades.
The stock hit an intraday high of Rs. 132.8 and intraday low of 125. The net turnover during the day was Rs. 114340683.