MOSL: MAHINDRA FINANCIAL SERVICES (Buy)-Migrates to 90dpd-targets 9-10% GNPL ratio on 90dpd by end-FY18

​Mahindra Financial Services: Migrates to 90dpd; targets 9-10% GNPL ratio on 90dpd by end-FY18

(MMFS IN, Mkt Cap USD3.5b, CMP INR406, TP INR481, 19% Upside, Buy)

• Mahindra & Mahindra Financial Services (MMFS) reported strong operating performance. AUM grew 14% YoY to almost reach INR500b, registering the fifth straight quarter of 13-14% AUM growth. Growth was driven primarily by tractors (+14% YoY), pre-owned vehicles (+14% YoY), and SME (+71% YoY).
  
• MMFS bit the bullet and migrated its NPL recognition to 90dpd. GNPL ratio declined 20bp QoQ and 70bp YoY to 10.3% on 120dpd. GNPL ratio on 90dpd was 12.5%. MMFS targets to bring it down to 9-10% by end-FY18.
  
• MMFS incurred a provisioning cost of INR 4.45b in the quarter, of which INR1.8b is attributable to the NPL migration. The company wrote off 15,000 NPL contracts amounting to INR3.5b in the quarter.
  
• While PCR optically appears low (51%), if MMFS is able to achieve its 10% GNPL ratio target by end-FY18, the current provision buffer is enough to achieve a PCR of 60%. Hence, incremental credit costs should come down (management targets INR11b credit costs in FY18).
  
• Valuation and view: The business environment for MMFS seems to be getting better. Asset quality data signal early signs of revival. Growth is also picking up. We like the fact that the company chooses to improve balance sheet quality over near-term profitability, and has migrated to 90dpd in advance of regulatory requirement. The company’s long-term prospects remain strong. We increase FY18/19 EPS estimates by 2%/8% and increase our TP to INR481 (SOTP; September 2019E-based). Buy.