EUR 120.00 For Business Accounts Only

MOSL: MAHINDRA FINANCIAL SERVICES (Buy)-Higher Opex / credit costs drive a big PAT miss

MAHINDRA FINANCIAL SERVICES: Higher Opex / credit costs drive a big PAT miss; cut estimates by 15-18%

(MMFS IN, Mkt Cap USD2.7b, CMP INR304, TP INR400, 31% Upside, Buy)

 

• MMFS reported PAT of INR0.7b, significantly below our estimate of INR3.2b, due to higher-than-expected operating expenses and a sharp jump in provisions.
• Asset quality: As 1Q is a seasonally weak quarter, the GNPL ratio increased 150bp QoQ to 7.4%. At the same time, MMFS increased its PCR on stage 3 assets by ~600bp to 25%. These two factors resulted in an unexpectedly high credit cost of INR6.2b for the quarter.
• AUM growth remained strong at 6% QoQ/22% YoY. On a sequential basis, AUM mix was unchanged, with car/UV and tractor financing comprising 47%/17% of total AUM.
• Opex increased 45% YoY to INR5.6b owing to one-time employee gratuity and other expenses of INR300m.
• With the margins largely stable at 7.9% YoY, NII grew by a healthy 18% YoY to INR12.8b (3% beat). The share of securitized assets increased from 1% of total borrowings in the year-ago period to 9% in 1QFY20.
• Valuation view: Despite a slowdown in OEM volumes, MMFS has been able to deliver strong AUM growth, driven by its diversification into new product segments (such as pre-owned vehicles and CV/CE) and increasing share in different OEMs. While the company is likely to gain market share, we expect AUM growth to moderate to 14% YoY by year-end. Asset quality performance has been in line with expectations; however, up-fronting of provisions on stage 3 assets and movement within stages 1-3 of loans (based on macros) are likely to keep credit costs volatile. We cut our estimates for PPoP by 5-7% and PAT by 15-18% to factor in higher credit costs. Maintain Buy with a target price of INR400 (SOTP-based).