M&M Financial Services - Stress bottomed out; will now tread the path towards normalisation - ICICI Securities

Buoyancy in rural segment is yet to reflect in M&M Financial Services' (MMFS) performance. The company's Q3FY21 earnings witnessed abnormally elevated incremental stress accretion with stage-3 assets at 10% and stage-2 assets at 14%. Without resorting to any subjectivity, it conservatively provided towards this incremental stress (registering >8% credit cost in Q3FY21) reporting a loss of Rs2.5bn. It now carries cumulative provisions at 6.6% of AUMs. Virtually zero restructuring (estimate of 5-7%) and rebound in collection efficiency (96%/88%/82% for Dec/Q3FY21/Oct) suggest likelihood of some pool moving out of stress in coming quarters. Disbursements were down >35%/50% YoY in Q3FY21/9MFY21 dragging asset growth. Upfronting the stress, we revise our earnings estimate down by 40% for FY21E and up by 17% for FY22E leading to 10-12% interim RoEs. However, earnings volatility and elevated stress is captured in the stock's under-performance of 46% over the past 12 months. Valuations at 1.3x FY23E ABV will cap further downside especially when earnings seem to have bottomed out and metric will only look up from hereon. Maintain ADD with a revised TP of Rs175 (assigning 1.5x FY23E ABV, earlier Rs142). Key risks - Further rise in stage-3 pool.

- Abnormally higher stress and elevated credit cost: There was a sharp spike in stress pool for MMFS with stage-3 assets rising to 10% (from 7%) and stage-2 assets at 14% (from 7.7%). There was virtually zero restructuring against the estimated restructuring for 0.10mn-0.15mn customers (6-7%) flowing from a few vulnerable segments - cab aggregators (1.5% of advances), school bus, hotel / tourism, heavy CVs, etc. What surprised hugely was 10% incremental rise despite the management highlighting earlier that estimated restructuring already overlaps with stage-2 and pro forma stage-3 of Q2FY21. We were anyway building in >11% stage-3 for FY21; however, stage-2 accretion to this extent was not anticipated.

- Does collection efficiency suggest stress has bottomed out: Contrasting the stress pool trend, there was consistent rebound in collection efficiency - 96%/88%/82% for Dec/Q3FY21/Oct, respectively and is expected to go further up. This suggests customers are making partial payments - only 6% customers in stage-2 pool have not paid any installment since March. In fact from stage-2 pool, >30% customers are regularly servicing installments (though not in full). From the vulnerable pool (that was anticipated to be restructured), almost 50% have honoured three months' installments. Sustained repayment may lead to upgrades from stress buckets in coming quarters.

- Upfront provisioning to restrict further knock: Positively, without resorting to any subjectivity, it conservatively provided towards this incremental stress (registering >8% credit cost in Q3FY21), now carrying cumulative provisions at 6.6% of AUMs. This includes contingency provisioning of Rs10.6bn (dipped into existing Q2FY21 buffer of Rs14.8bn). It, thereby, sustained net stage-3 <4% - similar to pre-covid levels.

- Rural buoyancy yet to reflect in growth: Sentiment in MMFS' target segment (rural/semi-urban) is turning positive and the company too had prepared itself for upcoming opportunities through deep presence, partnership/co-lending and strong dealer relationships. However, collections taking precedence over disbursements in the interim and cautious approach towards few product segments/geographies resulted in disbursements being down 50% in 9MFY21. We expect demand for tractors, UVs, cars, etc. to normalise quicker than CVs/SMEs, which may lag for a while. Normalisation to pre-covid level is prolonged leading to flat AUM growth in FY21E; we build 13%/17% growth in AUM over FY22E/FY23E, respectively.

- Cost containment through more definite and sustainable savings: MMFS has shaved off almost 100bps cost (to assets), of which, 40-50bps seems definite and sustainable as rental, legal, BPO service, etc are revisited. MMFS has also rationalised 66 regional offices and deployed employees internally. Cost to assets may retrace back 30/50bps to support >15% AUM growth, but will still be capped at sub-2.5%.

- NIMs holding on well: Ability to tap newer borrowings from multiple sources and better liquidity management will help it sustain NIMs at superior levels. The company has lowered rates to pass on the benefit of falling borrowing cost. And, especially for its customer profile, the company has adequate pricing power despite competition intensity rising in tractors, farm segment, from its peers.

Shares of MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD. was last trading in BSE at Rs.154.9 as compared to the previous close of Rs. 164.2. The total number of shares traded during the day was 1722917 in over 17469 trades.

The stock hit an intraday high of Rs. 161.35 and intraday low of 149.7. The net turnover during the day was Rs. 266794836.

Source : Equity Bulls

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