MOSL: MAHINDRA FINANCIAL SERVICES (Buy)-Strong performance-Business tailwinds drive guidance upgrade

Mahindra Financial Services: Strong performance; Business tailwinds drive guidance upgrade

(mmfs IN, Mkt Cap USD4.8b, CMP INR507, TP INR600, 18% Upside, Buy)

• MMFS reported PAT of INR4.2b (5% miss). While net income was in line and provisions were lower than estimated (23% lower), higher one-time gratuity provisions and employee incentive cost led to the PAT miss.
• Key positives: a) Calculated NIM on AUM expanded 140bp QoQ, led by yield expansion, as MMFS gained market share in used vehicles and non-M&M OEMs. b) Adj. AUM grew 19.5%/6.6% YoY/QoQ (ahead of our estimate), marking sturdy growth after 12 straight quarters of range-bound growth (8-12%). c) GNPA (on 90dpd) in absolute terms fell 22% QoQ to INR47.0b, and PCR improved 280bp QoQ to 58%. GNPA % declined 300bp QoQ to 8.5%.
• According to management, over the next few quarters, OEMs will reduce discounts on vehicles, manifesting higher disbursements. From the earlier range of 14-15%, AUM growth guidance is increased to 18-20%. Management also expects NIMs to be largely flattish-to-improving, and credit cost to come down to 1.8-2% by FY20 from 2.6% in FY18. Further, it targets to bring down GNPA % to 7% by 1HFY19, despite a seasonally weak period.