MOSL: MAHINDRA FINANCIAL SERVICES (Buy)-Green shoots of growth and asset quality recovery

Mahindra Financial Services: Green shoots of growth and asset quality recovery

(MMFS IN, Mkt Cap USD4.6b, CMP INR490, TP INR575, 17% Upside, Buy)

• MMFS reported PAT (adjusted for stake sale gain) of INR2.9b, exceeding our estimate by 17%, driven by net income beat of 6% (helped by lower cost of funds) and lower provisions (INR2b v/s estimate of INR2.2b). During the quarter, the company recorded one-off gains of INR650m (INR500m post tax) on sale of stake in one of the subsidiaries. PAT including stake sale was INR3.42b. The gain was not factored in our estimates.
• AUM grew 13.5%/3.7% YoY/QoQ (in-line), registering sixth straight quarter of 13-14% AUM growth. With the base becoming favorable, we expect AUM growth of 16-17% in 4QFY18. Growth was driven primarily by tractors, CV and CE (+13% YoY), and SME (+1.3x YoY). On a sequential basis, CV/CE (+12%), Tractors (+10%) and Cars (+8%) were the key drivers.
• GNPA (on 90dpd) in absolute terms declined by 3% QoQ to INR60.2b, and PCR improved 400bp+ to 55%+. GNPA % declined 90bp QoQ to 11.6%. Management targets to bring it down to 9-10% by end-FY18. The number of NPL contracts declined 10% QoQ, implying that smaller-ticket NPLs were resolved in the quarter. If MMFS achieves its 10% GNPL ratio by end-FY18 target, the current provision buffer is enough to achieve a PCR of 60%. Hence, incremental credit costs should come down.