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Mahindra & Mahindra Financial Services - Portfolio stress peaking out - HDFC Securities

Posted On: 2021-07-28 17:20:51 (Time Zone: UTC)

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

MMFS disappointed our expectations with a loss of INR 15.3bn, on account of higher provisions (up 2.3x YoY) at INR 28.2bn, which was the outcome of an inflated stress pool of 35% (GS-II at 19.4% and GS-III at 15.5%). Asset quality deteriorated as collections and disbursements were significantly impacted by the second wave, as witnessed across other lenders. We revise our FY22/23E forecasts downwards by 14.4/3.3%, factoring in higher credit costs and interest reversals. However, gradual normalisation of portfolio stress, sponsor-backed funding cost advantage, and inexpensive valuation underpin our ADD rating with a revised TP of INR 177 (earlier INR 183), implying 1.2x Mar'23 ABVPS.

Portfolio stress peeking out: MMFS reported GNPAs of 15.5% and a GS-II portfolio (including restructured loans of 2.8%) at 19.4%, taking the total stress book to 35%, reflecting the difficulties in physical collection and the need for rural customers to hoard liquidity. The management commentary suggests that the stress is transient as (a) 75% of GS-II loans have exhibited significant repayment activity and (b) a meaningful proportion of NPAs have paid up 50% of their outstanding loans. As the macro environment situation normalises, MMFS is likely to migrate to 35-40% PCR (in line with its historical LGDs) and, accordingly, witness significant provision reversals over the next three quarters. We build in GNPAs of 12% and 9% for FY22E and FY23E respectively - we also build in credit costs of 3.2/2.7% in FY22/FY23E.

AUM growth to rebound in H2FY22: Disbursals de-grew 35% sequentially (up 42% YoY due to a low base). Tractor disbursements have continued to lose traction (clocking below-industry growth rate) over the past couple of quarters on account of a high share of commercial tractors. We continue to build in an AUM CAGR of 10.7% over FY22-23E, likely to be back-ended towards H2FY22, led by tractors (17% of AUM), pre-owned vehicles (12%) and Auto - M&M (29%).

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.

Source: Equity Bulls

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