The conservative approach of the management is likely to pay dividend in the long term
MAS Financial Services, the Gujarat-based NBFC , reported a solid quarter in Q2 FY19 and showed no incremental deterioration in earnings quality despite myriad headwinds.
The stock has corrected by close to 19 percent in the past two months. While liquidity is not the foremost concern for MAS, other causes for worry are distribution model banking on 100 odd NBFCs and the heightened competition in MSME space in view of the recent proposal of quick loan approval by PSU banks at the behest of the government.
While we do not doubt the management’s focus on growing with caution and ensuring profitability and a healthy asset quality; in view of the recent sectoral concerns, the stock performance may remain weak in the near term. This could provide long term investors a good opportunity to accumulate this high quality business for a steady earnings trajectory in the mid-20s.
A niche player
The company operates across six states and Delhi although majority of the branches are in economically vibrant states of Gujarat and Maharashtra.
The business primarily focuses on loans to small businesses and individuals. At present there are four product categories – micro enterprise loans (MEL), SME , two wheeler and CV (commercial vehicle). The company also has a housing finance subsidiary catering to affordable housing.
End market knowledge and superior execution
MAS has a unique sourcing model. In addition to sales team, the company has entered into commercial arrangements with a large number of sourcing intermediaries, including commission based Direct Selling Agents and revenue sharing arrangements with various dealers and distributors where part of loan default is guaranteed by such sourcing partners.
It has over 100 small NBFC partners for sourcing business as well. The company feels that these smaller NBFCs are essential for the last mile delivery of credit. In view of the liquidity tightening in the system, while the overall growth of smaller NBFCs might slow down, the management sounded confident that it is unlikely to translate to an asset quality issue.
MAS has stringent qualitative and quantitative evaluation criteria that keeps a check on delinquency. This is reflected in the numbers with the Gross NPA and net NPA at 1.38 percent and 0.97 percent respectively. It is pertinent to note here that even as per the new accounting standards (Ind As) the fundamental parameters have not worsened including NPA (stage 3 assets) which are now identified on ECL (expected credit loss) criteria.
In the quarter gone by, riding on the robust growth in assets under management, the reported numbers were encouraging with pre-provision profit growing by 35 percent and after tax profit by 33.5 percent year-on-year (YoY) to Rs 33.5 crore.
Even in a rising rate environment, MAS has succeeded in lowering its cost of borrowings to 8.85 percent in the September quarter from 8.95 percent in the year-ago quarter.
MAS has been consistently reducing its cost of funds by diversifying its borrowing mix – NCD, Commercial Paper, Term Loan and Cash Credit. Close to 49 percent of the AUM is assigned to banks and financial institutions and the cost of funding from this source is quite competitive. The company doesn’t expect any liquidity issue as the funds for the whole year is tied up and it doesn’t have any asset liability mismatch. The company doesn’t see any risk to its growth in the mid-twenties.
The housing finance subsidiary too reported steady performance with very low delinquency, 26 percent growth in total assets under management at Rs 237 crore and 120% growth in reported after tax profit at Rs 1.1 crore.
The company is very well capitalised (Capital Adequacy Ratio at 27.9 percent) and should have a steady road ahead in the long run. The recent correction has rendered the valuation more attractive. In light of the headwinds engulfing the sector, we expect the weakness to persist and advise investors to capitalise on the weakness to accumulate the stock for the long term. We believe that the conservative approach of the management is likely to pay dividend in the long term.