EUR 120.00 For Business Accounts Only

MOSL: MAHINDRA & MAHINDRA FINANCIAL (Buy)-Operationally healthy but yet another quarter of credit cost volatility

• MMFS reported a PAT of INR2.23b in 1QFY23 (40% miss), led by elevated operating expenses (cost-income ratio of ~40%) and higher credit costs of INR6.5b (including write-offs of INR5.7b)
• Business assets at ~INR677b grew 4% QoQ/ 7% YoY. Disbursements rose 3% QoQ/145% YoY to ~INR94.7b. Management expects healthy disbursement growth supported by improving inventory levels, overall price increase of OEMs and strong demand.
• We believe that MMFS will benefit from its parent Mahindra & Mahindra (M&M)'s strong recovery in auto volumes. We model an AUM/ PAT CAGR of 14%/28% over FY22-FY24E for an RoA/RoE of 1.8%/10%, respectively. Maintain BUY with a TP of INR235 (based on 1.7x FY24E BVPS).

 

Volatility in credit costs still inherent; expect credit costs to taper off

• There was seasonal deterioration in asset quality with GS3/NS3 increasing ~40bp/20bp QoQ to ~8%/3.5%, respectively. Stressed pool - GS2 and GS3 - contracted to ~20%.
• MMFS maintained stable PCR of ~58% on S3 loans. Restructured pool stood at INR35.9b (5.3% of the business assets v/s 6.2% in 4QFY22).

 

Margin stable, but operating expenses elevated

• MMFS reported a ~25bp QoQ decline in the cost of borrowings. Despite this, the spreads contracted ~10bp QoQ while margin improved ~5bp. We expect margin to remain stable over FY23 and contract ~20bp in FY24.
• Driven by investments in technology, data analytics and human capital for setting up newer businesses, the cost-income ratio was elevated at ~40%.

 

Key takeaways from the management commentary

• Even after adopting the RBI NPA circular in Oct'22, the company plans to maintain the current S3 PCR of ~58% and therefore does not expect provisions to increase significantly in the remainder of this fiscal year
• MMFS reiterated its guidance to double the AUM over the next three years
• Management expects credit costs to moderate over the next three quarters of FY23 driven by lower repossessions and need for write-offs.

 

Poised for growth; a strategic transformation on the cards - retain BUY

• The company has maintained its leadership position in the Tractor and Mahindra UV financing segments, which has always been its strength.
• While understandably, MMFS has exhibited volatile operating performance and weak asset quality in the past, we believe that the various strategic initiatives undertaken by the management, if executed correctly, have the potential to script a credible transformation.
• Strong liability franchise and deep moats in rural/semi-urban customer segment position MMFS well to reap rewards of the hard work that is going into evolving this franchise.