JM Financials' Q4FY18 results (Outperformer) - A strong quarter

Q4FY18 results highlights

• JMF reported a strong quarter with consolidated PAT growing 25% yoy and 12% qoq to Rs1.3bn.  Strong growth in ARC and IWS profit were the key growth drivers.  Profit from fund-based businesses grew 27% yoy and 10% qoq. Profit from fee-based businesses grew 7% yoy and declined 11% qoq. In fee-based businesses while profit from IWS grew strongly, profit from asset management fell sharply.  Fund-based businesses contributed 75% to pre-MI PAT, similar to 75.5% in 3Q but higher than 74% in 4Q17. 
• Loans grew 30% yoy and 3% qoq. On a sequential basis, real estate and SME loans grew strongly while capital market and structured finance loans declined sequentially. Capital market loans declined 18% qoq on a high base. The yoy growth remained strong at 54%. Structured finance loans declined 3% qoq due to pre-payments. The yoy growth remained strong at 73%. Real estate loans grew strongly at 10.5% qoq. The yoy growth of 14.3% looks low because management took a conscious decision to consolidate the portfolio in 1HFY18 following RERA and GST. Growth in the real estate portfolio picked up in 2HFY18.
• Contribution of the asset reconstruction business to pre-MI PAT moved up sharply from 12% to 18% yoy.  PAT of JMFARC grew 92% yoy and 38% qoq driven by good recoveries from restructured accounts.  AUMs grew 9% yoy and 3% qoq. While growth in AUMs looks subdued in FY18, we expect AUMs to almost double to Rs250bn by FY19E from Rs130bn in FY18 given the huge build-up of stress loans in the banking sector and JMFARC’s strong competitive position.
• Credit cost for the fund-based businesses rose from Rs100m to Rs410m yoy largely on account of ageing provisions mandated by RBI on ARC assets. Asset quality of the lending businesses remained stable.
• NIMs for the lending business declined 40bps qoq to 5.6% as borrowing cost rose from 8.5% to 8.9%. The borrowing mix continued to improve with long term borrowings forming 66% of total against 58% qoq.

Valuation and view

We reiterate Overweight on JMF. We expect JMF to deliver strong earnings growth of 23% over FY18-FY20E. We expect  RoA to remain strong at 4.4% in FY20E and RoE of 18.6%. Stock trades at 2.1x PBV FY20E. We believe this valuation is compelling for a solid franchise that has delivered 23% EPS CAGR over FY15-FY18 and will likely continue to deliver strong EPS CAGR of 23% p.a over FY18-FY20E, with improving RoEs and sound asset quality. JMF recently raised QIP of Rs6.5bn of which Rs4bn will be infused into the ARC, Rs2bn into JM Credit Solutions and Rs1bn into JM Products. JMF has recently launched housing and SME finance, which will strengthen its lending growth, make the loan mix more granular and provide upside to our growth estimates.