Buy Mahindra and Mahindra Financial Services; target of Rs 504: HDFC Securities

HDFC Securities' research report on Mahindra and Mahindra Financial Services

Asset quality improved sharply, a 4Q phenomenon, exceeding expectations. G/NNPAs dipped ~20/11% QoQ to ~Rs 40.6/32.8bn (~5.9/4.8%). A relentless and sustained focus on collections resulted in a ~20% YoY drop in GNPAs. While susceptibility to rural stress (elections, poor monsoon etc.) remains, MMFS is better equipped than before. We have factored in GNPAs of ~6% over FY 19-21E. LLP reversals were ~Rs 1.15bn as recoveries improved. A rural-focused business model results in volatile recoveries. We expect quarterly ECL provisions to follow suit. Low coverage causes us to increase our LLP assumptions (~1.4% vs. 1.1% in FY19).

Outlook

Better than expected improvement in asset quality (GNPAs: ~5.9%) and provision reversals (~Rs 1.15bn) drove PAT (+95/88%). Maintain BUY with a TP of Rs 504 (2.75x Mar-21E ABV of Rs 177 + Rs 18 for MIBL).