M&M Financials Services' Q4FY19 results (Outperformer) - Strong beat on PAT and NPAs but disbursals slow

Q4FY19 result highlights

• PAT of Rs5.9bn was substantially higher than the consensus estimate of Rs4bn and grew 87% yoy and 84% qoq. The strong beat was on account of a huge write-back of provisions led by strong recoveries, the best in any quarter so far. Gross write-back of provisions was Rs3.1bn while write-offs amounted to Rs1.97bn leading to a net write back of Rs1.1bn against our estimate of a credit charge of Rs1.4bn.
• While there was a big beat on PAT, PPOP was 5% below our estimate due to high opex. Operating expenses grew sharply by 31% yoy and 16% qoq due to incentives on bad loan recoveries that were high during 4Q.  
• Disbursal growth slowed with disbursals declining 1% yoy and 12% qoq. While SME disbursals declined sharply, CVs and pre-owned disbursals grew 25% plus, tractors and UVs grew 5-6% and new car disbursals were flat yoy.  AUMs grew 27% yoy and 6% qoq. NIM remained flat qoq at 8.1%. Despite strong NPL recoveries, NIMs remained flat because under IND-AS income is accrued on NPLs so there are no write-backs on recoveries. NIMs could have been higher but for the liquidity cushion of Rs20bn (3% of assets) the full impact of which was seen in 4Q19. NII grew 29% yoy and 8% qoq.
• With recoveries at a historic high, GNPAs declined 20% qoq to 5.9% against 7.7% qoq. Stage-3 provisioning cover fell sharply to 19.2% from 26.9% qoq but mgmt. is not concerned about this because according to them in an ECL based model provisioning cover is an outcome. Management attributed strong recoveries in 4Q to the following factors 1) High cash in the system during elections which facilitates recoveries 2) Crop cash flow that came in 4Q 3) Pick up in state level / municipal construction activity that ensured good deployment of vehicles 4) good settlement values. Number of NPL contracts fell 33% qoq.
• MMFS has a comfortable ALM position.
• Mgmt has guided to lower AUM growth for FY20. Mgmt expects OEMs to grow 5-6%, their own disbursals to grow 11-12% and their AUMs to grow 15% in FY20 lower than the 21% AUM growth in FY19. NIMs will likely stay flat, 9MFY20 credit cost will be 1.4-1.5% while credit cost for 4Q20 will depend on recoveries.  

Valuation and view

With good traction on recoveries through FY19 and MMFS being largely unaffected by the NBFC liquidity crisis, we reiterate Outperform. Near-term stock price performance will be driven by how disbursal growth shapes up in the next few months given concerns of slowdown at OEMs and mixed report on monsoons. Our TP of Rs580 is based on 2.6x PBV FY21. We expect RoA to sustain at 2.5% in FY20/FY21.