Buy Mahindra and Mahindra Financial ; target of Rs 200: Motilal Oswal

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Motilal Oswal 's research report on Mahindra and Mahindra Financial

MMFS 4QFY20 PAT of INR2.2b (down 62% YoY), a 40% miss. The miss in PAT was led by a contingency provision of INR5.7b (we factored in ~INR2.2b) related to COVID-19. Of INR5.7b, INR4.7b was used to increase PCR (800bps QoQ to 31%) for GNPA. Pre-provisioning profits grew 24% YoY (beat of 14%) to INR9.7b as opex (27% beat) declined 24% YoY to INR4.2b. -Net income missed our estimate by 3% as loans stood largely flat QoQ (+6% YoY) at INR650b v/s the expectation of ~2% QoQ growth (on March-end COVID-19 restrictions). NIMs/GS3% came in flat QoQ at 7.7%/8.4%. - Restrictions imposed on the movement of goods and people due to COVID-19 would have a significant impact on growth and asset quality. We have cut estimates by 22%/4% for FY21/FY22. ROEs are likely to be less than 10% over FY20-22. While a valuation at 0.8x FY22 BV is comfortable, considerable relaxation in lockdown restriction remains a key catalyst.

Outlook

We have baked in a sharp drop of ~100bp in NIMs in FY21 due to challenging asset quality. A valuation of 0.8x PBV largely factors in near-term issues. Recovery/upgrades are likely to be the quickest as restrictions ease, as the underlying customer base's cashflows, especially in the Farming segment, are healthy. Buy.

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