Buy Mahindra Financial Services; target of Rs 400: Motilal Oswal

Motilal Oswal's research report on Mahindra Financial Services

MMFS reported PAT of INR0.7b, significantly below our estimate of INR3.2b, due to higher-than-expected operating expenses and a sharp jump in provisions. Asset quality: As 1Q is a seasonally weak quarter, the GNPL ratio increased 150bp QoQ to 7.4%. At the same time, MMFS increased its PCR on stage 3 assets by ~600bp to 25%. These two factors resulted in an unexpectedly high credit cost of INR6.2b for the quarter. AUM growth remained strong at 6% QoQ/22% YoY. On a sequential basis, AUM mix was unchanged, with car/UV and tractor financing comprising 47%/17% of total AUM. Opex increased 45% YoY to INR5.6b owing to one-time employee
gratuity and other expenses of INR300m. With the margins largely stable at 7.9% YoY, NII grew by a healthy 18% YoY to INR12.8b (3% beat). The share of securitized assets increased from 1% of total borrowings in the year-ago period to 9% in 1QFY20.

Outlook

We cut our estimates for PPoP by 5-7% and PAT by 15-18% to factor in higher credit costs. Maintain Buy with a target price of INR400 (SOTP-based).