Prabhudas Lilladher
Prabhudas Lilladher recently met up with transport and fleet operators, industry experts and auto financiers as part of ground checks to understand the current scenario in auto financing, the idle time of trucks, cost increases and the demand environment.
We continue to remain optimistic on the current up cycle on the demand environment and reckon that the current commercial vehicle (CV) upcycle should last for another two years marked by policy changes, changing fleet operating dynamics, shift to higher tonnage vehicles creating a sustainable demand.
Catching these emerging macro trends early-on, diversified businesses like Cholamandalam Finance (CIFC) and cyclical plays with product expertise such as Shriram Transport Finance (SHTF) and Mahindra & Mahindra Financial Services (MMFS) stand as clear beneficiaries.
Mahindra & Mahindra Financial Services
MMFS continues to improve its market share across segments, while the remaining leader in M&M (30-35 percent)/Maruti (8-10 percent), especially in the rural side.
Going forward, the incremental traction should be largely driven by an anticipated normal monsoon, contribution from the new branch network (addition of 100 branches in FY18), renewed infra activity and improving cash flows in troubled pockets.
Against this backdrop, we reckon MMFS to maintain healthy 18 percent AUM growth over FY18-FY21. MMFS completely remain focused on rural penetration and positioning maintaining its market leadership.
The loan growth buoyancy and cash flow uptick tailwinds aiding asset quality improvement should help deliver 2.5-2.7 percent ROA, 15-18 percent ROE and 30-40 percent earnings growth over FY19-FY20.
We retain Accumulate recommendation with a revised target price of Rs 553 based on 3.2x Mar-20 ABV.
While new CVs demand stands on the rise with a shift to higher tonnage segment, the management continues to thrust on the higher yielding used CV business that forms 84 percent of the overall AUM.
Going ahead, with a pickup in infra activity and favorable monsoon outlook, and increasing penetration into rural/urban centres should aid AUM growth of 18 percent-20 percent over FY19-20E. With one-third of liability getting repriced each year, better lending yields remaining stable (14 percent+), we believe SHTF should clock NIMs at 8.6-8.7 percent by FY20E.
Moreover, the greater thrust upon customers’ proposed business model and cash flows improving coupled with an enhanced provision in place (PCR at 70 percent), the asset quality woes stand behind.
Against this backdrop, we reckon gross NPA to settle at around 7 percent by FY20E. We retain our Buy stance with a revised target price of Rs 1,832 based on 2.6x Mar-20 ABV.
CIFC has been the only consistent sector outperformer with a track record of 17-18 percent+ RoEs for past five years, further poised to clock 20 percent sustainable RoEs.
Riding the cyclical recovery, we reckon CIFC to deliver robust 27 percent earnings CAGR over FY18-20E driven by strong AUM traction, imminent margins stability, enhanced operating efficiencies and capital sufficiency.
Given the strong earnings momentum, we envisage RoE to rise to 22 percent levels by FY20E averaging at 20 percent over FY18-20E. RoAs, on similar lines, should stack up to 2.8 percent+ by FY20-end.
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