MOSL: MAHINDRA FINANCIAL SERVICES (Buy)-Strong beat on operating profit driven by asset quality improvement

​Mahindra Financial Services: Strong beat on operating profit driven by asset quality improvement

(MMFS IN, Mkt Cap USD3.0b, CMP INR340, TP INR400, 18% Upside, Buy)

• 4QFY17 net profit of INR2.34b missed estimate by 16%, belying its strong operating performance. PPoP increased 7% YoY to INR7.25b (23% beat). Miss on PAT is largely driven by provisions of INR1.1b, which were written back (over and above RBI requirement, and managements expected loss given default) in 1QFY17 based on expectation of losses on NPA portfolio.
  
• Reported AUM increased 14% YoY (+2% QoQ) to INR468b, driven by a 23% YoY rise in value of assets financed. This is the third consecutive quarter of 14% AUM growth, up from +10-11% over the prior 4-6 quarters. Management is confident of revival in growth in most geographies due to improved infra and farm sentiment.
  
• Cost of funds declined sharply by 70bp QoQ to 8.39%. Overall, margins expanded 325bp QoQ (seasonal phenomenon), but shrunk 25bp YoY to 10.48%. This is because of the strong recoveries witnessed in 4QFY16, which gave a boost to NIMs.
  
• GNPLs declined 17% QoQ to INR42b (4Q is seasonally strong). GNPL ratio stood at 9%, as against 11.1% in 3QFY17 and 8% in 4QFY16.
  
• PAT for FY17 declined 40% YoY to INR4b, with RoA/RoE declining from 2%/11.4% in FY16 to 1%/6.4% in FY17.