Buy Mahindra and Mahindra Financial; target of Rs 175: Motilal Oswal

Motilal Oswal's research report on Mahindra and Mahindra Financial

MMFS reported a net loss of INR15.3b v/s our PAT estimate of +INR2.9b. While operating profit declined by 28% YoY to INR7.5b (31% miss), higher credit costs of INR28.2b (est. INR7b) drove the PAT miss. Elevated credit costs are a function of forward flows into S2/S3, higher provisions on restructured loans, and additional COVID-19 provisions to strengthen the ECL overlay. NII was down by 16% YoY/25% QoQ, driven by: a) interest income reversals on NPAs, b) 6% YoY decline in business assets, and c) some moderation in loan yields. NIM (calculated) stood at 8.04%, down 60bp YoY. Total credit costs stood at 4.84% (non-annualized). MMFS has always exhibited the highest volatility in asset quality and associated credit costs within its peer set. In an unfavorable external environment, its asset quality has exhibited vulnerability and has taken 12-18 months for some normalcy to return. On a low base, we cut estimates sharply for FY22E to factor in up-fronting of provisioning expenses. We maintain our Buy rating with a TP of INR175 per share (1.3x FY23E BVPS).

Outlook

We remain conservative and cut our estimates sharply for FY22E to factor in up-fronting of provisioning expenses. If there is no incremental pain due to COVID then we might as well see upgrades going forward. While RoE is likely to remain subdued at ~5% in FY22E, it should touch ~15% in FY23E. We maintain our Buy rating with a TP of INR175 per share (1.3x FY23E BVPS).