Buy Mahindra Financial Services; target of Rs 459: Motilal Oswal

Motilal Oswal's research report on Mahindra Financial Services

Mahindra & Mahindra Financial Services (MMFS) had a strong quarter on the operating front. Value of assets financed increased 16% YoY in 1QFY18 – the fourth consecutive quarter of 15%+ YoY growth. This comes after a span of over 12 quarters of sluggish growth, caused by a variety of external factors. Management expects strong growth to sustain or even improve.  GNPL ratio increased 150bp QoQ, but declined 20bp YoY to 10.5%. The sequential increase, which is seasonal, is much lower than that witnessed in the past three years. Asset quality data from the past 10 years suggest that in a good economic cycle, 4Q-to-1Q GNPL increase is ~50-100bp, while in a bad cycle, it goes to as high as 250+bp.  The company incurred provisioning cost of INR834m, based on its assessment of underlying collateral for NPLs, on which 100% provisioning has been made. As a result, PCR was largely stable at 60-62%. The sequential PCR decline of a mere 130bp is the lowest in the past 11 years (average decline of 600bp). We view this shoring-up of provisions as a positive sign as it strengthens the balance sheet, despite the negative impact on near-term profitability.

Outlook

The business environment for MMFS seems to be getting better. After several quarters of sluggish disbursement growth, MMFS has finally delivered four consecutive quarters of 15%+ growth. Asset quality data too signal early signs of revival. We like the fact that the company chooses to improve balance sheet quality over near-term profitability. The company’s long-term prospects remain strong. As MMFS is highly levered to growth and asset quality, this would have a multiplier effect on the return ratios. We upgrade FY18/19 EPS estimates by 9%/18% and our TP to INR459 (SOTP FY19 based). Buy.