MOSL: MAHINDRA FINANCIAL SERVICES (Buy)-Strong operating performance; Transition to Ind-AS positive

Mahindra Financial Services: Strong operating performance; Transition to Ind-AS positive

(MMFS IN, Mkt Cap USD4.6b, CMP INR513, TP INR600, 17% Upside, Buy)

• MMFS reported PAT of INR2.7b (+34% YoY) under Ind-AS. The quarter was marked by robust disbursement and AUM growth, as well as an improvement in margins.
• Continuing the trend of the prior quarter, value of assets financed grew 35% YoY to INR103b. For the first time since 2012, disbursement growth has been above 30% for two consecutive quarters.
• Consequently, reported AUM grew 7% QoQ/23% YoY to INR587b. Over the past year, the share of Auto/UV declined from 30% to 27%, which was offset by an increase in the share of SME financing (8% to 12%).
• Calculated NIM on AUM expanded 130bp YoY to 7.7%, driven largely equally by higher yield on loans (better asset quality performance), lower cost of funds and lower leverage. Like peers, MMFS has increased the share of bank borrowings and CPs, and has decreased the share of NCDs over the past year. Opex grew slower than AUM at 18% YoY, resulting in some operating leverage.
• Gross stage 3/net stage 3 loans declined YoY from 14.5%/9.3% to 9.4%/6.3%. Also, as of FY18, gross stage 3 loans were 9% compared to the GNPL ratio of 8.5%. Total provisions as a percentage of loans stood at 5.3% v/s 5.1% a quarter ago and 6.7% a year ago. PCR including standard assets provisions was largely stable QoQ at ~59%.