(Rating: BUY, TP: Rs 180, Upside: 21.6%)
Asset quality improvement key to stock's outperformance
- MMFS reported a large loss of Rs15.3bn (10%+ of Net-worth) in Q1 FY22 due to substantial deterioration in PAR metric that depressed NII and inflated credit cost.
- Substantial interest reversal of Rs2bn drove 200+ bps decline in portfolio yield which caused NIM (Gross Spread) compression on qoq basis.
- The substantial spike in PAR 30 (from 21.5% to 35%+ incl. w/offs) mandated ECL provisioning of Rs24.3bn in Q1 FY22.
- Management expects rollbacks and provisioning release in H2 FY22 for majority loan contracts that slipped into Stage 2 & 3 buckets during Q1 FY22.
- There has been a sharp improvement in collection efficiency since mid-June. In our assessment, there exists high probability of absolute credit cost for the full-year being materially lower than Q1 FY22 if collections were to not see another disruptive phase.
- While MMFS's has disappointed on asset quality and growth in the recent past, stock's valuation at 1.3x FY23 P/ABV has limited room for further de-rating. Rather a re-rating could ensue if collections and business environment witness a sustained recovery.
Shares of MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD. was last trading in BSE at Rs. 142.45 as compared to the previous close of Rs. 148.05. The total number of shares traded during the day was 2166208 in over 8146 trades.
The stock hit an intraday high of Rs. 149.4 and intraday low of 141.5. The net turnover during the day was Rs. 308577695.