IDFC Securities’ analysis of Mahindra Finance’ Q4 earnings

M&M Financial Services (CMP: Rs 340)

Mkt Cap: Rs 193.6bn; US$3.0bn Bloomberg code (MMFS IN)

Q4FY17 result highlights

· MMFS reported PAT of Rs2.3bn lower than our estimate of Rs3.3bn as the company reversed Rs1.1bn of revaluation credit it had taken in 1Q The reversal happened through the provisioning line resulting in higher than expected credit cost. The bank has pending revaluation credit of Rs0.8bn which may have to be reversed if they are not able to recover the exposure associated with the revaluation credit.

· Gross NPLs declined 17% qoq on reported figures and 27% qoq after taking into account the dispensation in 3Q. Two-thirds of the dispensation-related loans were recovered. A part of the NPL reduction was driven by the revaluation-reversal where exposures related to that reversal were written off. The normal seasonal recovery excluding the revaluation-related write-off was 16% of opening NPLs versus 19% in 4Q16, according to our calculation (Figure 1).

· Gross NPAs account for 9% of loans versus 11% qoq and 8% yoy. Net NPLs have declined to 3.6% of loans from 5.2% qoq. The reversal of revaluation credit and decline in new NPL formation has led to an increase in provisioning cover qoq from 56% to 62%. On a yoy basis provisioning cover remains unchanged. Mgmt believes that new NPL formation peaked in 3Q and that waivers do not impact the repayment culture of the rural class MMFS caters to. Mgmt expects new NPL formation to continue to decline in FY18.

· Disbursal and AUM growth remained strong at 23% yoy and 14% yoy. Management guided to 15-18% loan growth for FY18. Management also guides to RoE reviving to 15-16% in FY18 (RoA of 3%) backed by lower credit cost and lower cost -asset ratio.

Valuation and view

We are rolling over base to FY19 and increasing our TP to Rs310. While we expect RoA to improve from the current low of 1%, the recovery will be modest given the pending migration to 90 days in FY18. The migration will keep credit cost high in FY18. We expect credit cost to decline from 337bps of on-book AUMs in FY17 to 2.6% in FY18 and 2% in FY19. We expect RoA to improve to 1.3% in FY18 and to 1.5% in FY19, higher than 1% in FY17 but lower than the 10-year normalized RoA of 3.4%. While the stock is cheaper than other NBFCs at 2.5x PBV FY19, our expectation of lower-than-normalized RoA through FY19E makes us reiterate Neutral. A stronger than expected monsoon leading to lower than expected credit cost is the key upside risk to our forecast for FY19E as MMFS remains one of the most monsoon-geared stocks among financials.

To read report click here: MMFS - Apr17 RN).pdf

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