M&M Financials Services' Q4FY18 results (Upgrade to Outperformer) - Strong earnings, bullish guidance
Q4FY18 result highlights
- MMFS reported a strong quarter. PAT of Rs4.3bn grew 81% yoy and 24% qoq. PAT was lower than our estimate of Rs5bn due to higher opex. Asset quality improved with gross NPLs down 22% qoq to 8.5% from 11.6% in 3Q18. The CEO guided that disbursals would grow 20% yoy in 1HFY19 and 25% in 2HFY19, driven by strong rural cash flows. He guided to NPLs of 7% over the next 4-5 quarters. The CEO does not see any significant pressure on margins from rising rates. The company will continue to raise rates on select products to maintain margins.
- Disbursements grew strongly by 42% yoy and 11% qoq led by a strong 63% yoy and 27% qoq growth in pre-owned vehicles that do not include used CVs and a growth of 67% yoy and 20% qoq in new CVs. AUMs grew 18% yoy and 6% qoq led again by pre-owned vehicles and CVs. In terms of geography wise growth, UP and MP are the fastest growing states while demand remains weak in Tamil Nadu, Karnataka and Kerala.
- GNPAs declined 22% qoq to 8.5%. Write-offs during the quarter rose to Rs3.24bn from Rs2.2bn while loss on repossession fell to Rs2.6bn versus Rs3.1bn yoy in 4Q18.
- Gross spread rose qoq with better recoveries. Spread for FY18 came in at 8.8% against 8.5% for 9M18. NII grew 46% yoy and 22% qoq.
- Operating expenses grew 22% yoy and 15% qoq. The sharp jump was driven by one-offs relating to gratuity. Operating profit grew 15% yoy and 26% qoq.
- Consolidated earnings grew strongly by 99% yoy for FY18. NPLs of rural housing after rising sharply through FY18E have fallen to 10.5% though they remain higher than 9.7% yoy. Management guided that NPLs for housing would fall to 7% once recoveries from Maharashtra pick up.
Valuation and view
With continued traction in growth and bad loan recovery in the last two quarters, we believe MMFS has entered a strong phase of earnings growth and recovery. We upgrade our earnings to factor in higher growth and lower NPLs. We expect earnings to grow 41% over FY18-FY20E. We expect RoA of 2.6% by FY20 and RoE of 15.9%. We upgrade the stock to Overweight on expectation of a sustained RoA and RoE progression over the next two years. Our target price of Rs580 values the company at 3x PBV FY20E.
Mahindra & Mahindra Financial Services is a non-banking financial company, provides financial products and services in the rural and semi-urban markets in India. Co. offers vehicle financing for auto and utility vehicles, tractors, cars, commercial vehicles, two wheelers, three wheelers, and construction equipment; pre-owned vehicle financing for cars, multi-utility vehicles, tractors, and commercial vehicles; housing finance for new houses, and house renovation and improvements; and SME financing services, including project finance, equipment finance, and working capital finance. Co. also provides personal loans.
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