Buy Mahindra and Mahindra Financial; target of Rs 650: JM Financial

JM Financial's research report on Mahindra and Mahindra Financial

Key takeaways from our meeting with Mahindra Finance (MMFS) management: i) Disbursement growth remains strong for July/August at c.30%. Management expects 20%+ AUM growth in FY19 (vs. 18% in FY18) which could accelerate to 25% in FY20 ii) Asset quality is significantly improving and company has witnessed 5% improvement in collection efficiency during July/August; Management expects GNPL to reduce to 7% by FY19 (vs. 9.4% in Q1) iii) MMFS expects 15bps increase in average outstanding cost of funds (incremental cost of funds up 75bps) which will be passed on via higher lending rate; iv) NPLs in the housing subsidiary have peaked and significant improvement is expected during 2HFY19 v) Management expects RoA/RoE to improve to 3%/18-20% by FY20 (vs. 1.8%/11% in FY18);

Outlook

We believe, with acceleration in growth and significant improvement in profitability, MMFS is well-placed to report top quartile return ratios over the next 2 years. We maintain BUY with a Mar’19 TP of INR 650.