Buy M&M Financial with medium to long-term view: Kotak

Nischint Chawathe, Senior Analyst at Kotak Institutional Equities in an interview to CNBC-TV18 analysed some of the second quarter earnings from the non-banking financial space.With regards to Mahindra and Mahindra Financial although the numbers were not good but they were better than Kotak's expectations. The house was expecting the company to report poor numbers due to weak monsoon.Mahindra & Mahindra Financial Services has reported a 28.37 percent decline in consolidated net profit at Rs 157.11 crore for the second quarter ended September 30, due to higher expenses.The house has a buy rating on the stock with price target of Rs 300 with a medium to long-term view. The company has a strong rural auto franchise and when things turn around they usually bounce back in a big way, said Chawathe.Comparing LIC Housing Finance and HDFC, he does not expect margin expansion for HDFC in its retail book won’t be as much as that for LIC Housing.The stock price of SKS Microfinance did not reflect the good numbers because maybe there are some overhangs with respect to it not getting bank licence and secondly, investors could be analyzing the reason for the massive increase in profit guidance by the company. Once this analysis is done the stock could move up.SKS Microfinance revised its annual guidance from Rs 235 crore earlier to Rs 290 crore.Below is the verbatim transcript of Nischint Chawathe’s interview with Ekta Batra & Anuj Singhal on CNBC-TV18. Ekta: First on Mahindra & Mahindra (M&M) financial services, how did you read the gross non-performing loan (NPLs) and do you think the worst is already factored into the stock? A: If I optically look at a movement in gross NPL ratio obviously the movement was much higher. However, the company also made a migration in their NPL recognition norm. So, that was one of the reasons. If I look it on a like to like basis, possibly the movement was around 60 basis points. If I try to look at what happened during the quarter and the fears of that we had in terms of monsoon shortfall that it will have an impact on M&M finance it has been better than what we thought it would be for this quarter. That was a little better and possibly that is what gave conviction to the management that they should take this plunge and move ahead to a most stringent NPL recognition norm although they don’t need to do anything this year. I would say that it was better than our expectation having said that you know that things are weak. The outlook also for next one or two quarters is not going to be strong. So, I would not be kind of saying that look near-term numbers are going to be strong but yes as compared to what we were thinking about it at the beginning of the quarter it was a little better. Anuj: What is your call on the stock and what is your price target?A: We have a buy rating on the stock and we have a price target of Rs 300. The broad thought process on this stock is that don't look at it on a quarter-on-quarter basis, look at it from a more slightly medium to long-term basis. This company has a very strong rural franchise, possibly it is a default option for any original equipment manufacturer (OEM) who is trying to distribute its products in the rural India.More importantly if you look at the swing in numbers is quite a lot so between good year and a bad year there is somewhere closed to around 600-700 basis points movement in return on equity (ROE) which obviously gets very difficult for an analyst to mull. So, we know when things turn around, things will bounce back very massively.Ekta: What are you expecting from HDFC on Monday?A: I just want to compare this with LIC's result. If you look at LIC's result they did report a margin expansion. You know that the borrowing cost is coming down massively and which is exactly the reason why the entire housing finance sector will have very strong tailwinds.HDFC did drop rates for their borrowers somewhere during the quarter so you won't see as much margin expansion in the retail book for HDFC as compared to LIC, but yes generally you have tailwinds for the sector so that would be quite good for HDFC as well.Ekta: The profit figure that you are working with?A: I don't have it right away.Ekta: Do you look at SKS Microfinance?A: That is right, we do.Ekta: Even though they have that FY16 profit guidance upped up and good numbers with 50 percent net interest income (NII) growth we didn't see it reflect in the stock performance at least for the past two days before and after numbers. What do you think impacted it?A: I guess everybody is assimilating the numbers, still trying to understand what the strategy is all about because they have increased their profit guidance quite massively. So, people are trying to understand what is happening over there. Maybe that is the reason why the stock has not fully reflected on the numbers. Obviously there is a little bit of overhang also that all your competitors have a bank licence so, how are things going to play out over next two to three years. If investors get answers to those questions possibly the stock will go up.