M&M Financial Services a long-term play, investors holding should apply for rights issue

Also Read: Mahindra & Mahindra Financial Services Q1 profit jumps 300%; board approves rights issue

A rights issue is a mechanism for listed firms to raise additional capital by inviting existing shareholders to buy new shares proportionate to their holding at a discount to the prevailing market price.

Reacting to the news, shares of M&M Financial Services rallied more than 10 percent on July 20. The steep discount the shares were being offered at was talked about in the analyst community.

The management later clarified it was their way of thanking shareholders in the company's silver jubilee year.

Moneycontrol spoke to analysts on what should investors do with the rights issue. With a strong rural focus, efficient cost control coupled with lower borrowing cost, the decision was not hard to make. Investors who hold M&M Financial Services shares should opt for the rights issue, they said.

“The announcement of the rights issue at a steep discount of Rs 50 against July 17's closing of Rs 207 per share is likely to be taken positively by the market. More than the rights issue, the steady growth in business along with signs of improvement in the niche segment of the company is likely to aid stock rally on a short-term basis,” Dinesh Rohira, Founder-CEO,  5nance.com told Moneycontrol.

“For an existing investors’ perspective, it will be a means to reward the shareholders even during difficult times despite the dilution post-rights issue as the company braces itself for asset-quality shock posed by the pandemic in the form of the moratorium and economic slowdown. Therefore, the positivity of Q1 earnings is likely to overshadow the negative impact in value after the rights issue,” he said.

The company has fixed the rights entitlement ratio as one fully paid-up equity share for every one fully paid-up equity share held. The issue opens on July 28 and closes on August 11.

Also Read: Rights issue bandwagon: M&M Financial, PVR, Shriram Transport & ABFRL gain

The company reported decent Q1FY21 numbers despite lockdown. The increase in profit can be largely attributed to cost rationalisation, reduction in the overall cost of borrowing and NPAs remaining stable, say experts.

“Further with the easing of lockdown and reopening of businesses, collections have started improving in June, which is a positive sign. Investors holding the stock may apply for the rights issue, keeping in mind the company’s future growth prospects and issue discount,” Ajit Mishra, VP- Research, Religare Broking Ltd, said.

“Besides, pickup in collections, reduced NPA levels, and cost-efficiency measures taken by the company would aid in improving its financials.”

Rural Focus:

Optically, with a diluted equity raise, the ROE and P/B numbers will look weaker in the short term but the debt/ equity ratio will improve amid expectations of a strong recovery in the rural economy.

“With the rural economy expected to lead the growth and with the backing of a good monsoon, M&M Finance is one of the few pure-play rural exposures with an opportunity to participate in this growth. In our opinion, the stock remains a long-term buy and existing investors should subscribe to the rights issue,” Siddharth Panjwani, Chief Strategy Officer, Pickright Technologies, told Moneycontrol.

While existing investors could fret over dilution but they should realise that in current circumstances it was more important to increase chances of 'survivability' than take additional risks. "A substantial number of customers (~70%) remain under moratorium,” he said.

Even though around percent of the customers had begun paying since June, there was uncertainty over about further extension and the debasement of the credit culture. It was therefore prudent to reduce leverage and increase balance sheet robustness, he said.

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