M&M Financials Services' Q2FY20 results (Neutral) - A decent quarter

Q2FY20 result highlights

• MMFS’ PAT of Rs2.6bn was lower than our estimate of Rs3bn driven by higher credit cost. PAT was higher than Rs684M qoq but lower than Rs3.8bn yoy. The company provided Rs0.4bn as contingency provisions (for stage 1+2 loans) due to a weak macro environment which explains the higher than expected credit cost. The mark down of DTA resulted in a one-time impact of Rs1.04bn.
• Disbursals remained under pressure declining 10% yoy against growth of 2.5% in 1Q. AUMs grew 16% yoy (2% qoq).
• NIM remained flat qoq at 7.6% but declined 60 bps yoy. NII grew 10% yoy / 1% qoq. Most of the incremental funding during the quarter came from securitization and foreign borrowings. The foreign borrowings are fully hedged at an all - in cost of 8.7%. Bank borrowing cost has come down by 30-40 bps and cost of raising bonds has come down by 50bps but amount of money that can be raised from the debt market is limited.
• Opex continued to increase sharply by 20% yoy (45% yoy in 1Q including one-offs). As opex grew faster than NII, growth in operating profit was weak at 5% yoy (10% qoq). The company is incurring higher expenses on collection. Collection teams are separate for different buckets (0-30, 31-60 dpd). In addition, there is a legal/recovery team & one team that looks at overall portfolio behaviour. Investment in better IT systems will also add to opex. The company is changing its IT platform with the help of TCS and investing in digital.
• Credit cost of Rs3.6bn was lower than Rs6bn qoq but 56% higher yoy. MMFS made contingency provisions of Rs400M towards Stage 1+2 loans given the weak CV cycle. This is why provisioning on stage1+2 rose 10 bp qoq to 1.7%.
• GNPAs fell 2% qoq from 7.4% to 7.2%. PCR on stage 3 loans declined from 25% to 20% qoq due to higher write-offs in the second quarter. Write-offs were Rs3.8bn for 2Q and 4.7bn for 1HFY20. Collection efficiency was 95% for 1HFY20 (92% in 1QFY20 and 95% in 1HFY19).
• Mahindra Rural Housing’s NPLs continue to remain high due to high NPLs in Maharashtra. NPLs ex Maharashtra stand at 8% and NPLs in Maharashtra are 18%.
• Guidance 1) Disbursal decline will not be as sharp as seen in 2Q. Disbursals are likely to be flat even on a high base of 2HFY19 given pick up demand in the festival season. AUM growth will continue to be in the 15-20% range with demand pick-up in festival season and higher share of pre-owned vehicles 2) Credit cost will only improve in 2HFY20 compared to1HFY20 given the seasonality. 3) ECL data will be reviewed in December

Valuation and view

With slower growth and higher credit cost we maintain Neutral. The company is not planning to raise fresh equity soon. We are increasing earnings by 5% in FY20 and 9% in FY21E largely due to lower taxation. Our TP increases marginally from Rs280 to Rs285.