Hold Mahindra & Mahindra Financial Services; target of Rs 443: Edelweiss

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Edelweiss' research report on Mahindra & Mahindra Financial Services

Mahindra & Mahindra Financial Services’ (MMFS) Q2FY18 PAT of INR780mn was lower than our estimate. The miss was on account of higher credit costs, as it transitioned to 90dpd recognition (versus 120dpd earlier). The transition optically led to GNPLs rising to 12.5% (up 220bps QoQ, lower than earlier guidance of transition impact, suggesting improving underlying trend).  Having said that, growth was softer, disbursement were flat YoY (impact of GST) but lower repayment trend pushed AUM growth to 14% YoY.  Management is optimistic on improving rural cash flows, which is likely to spur growth in second half (seasonally strong anyways). The stock is trading at 2.85x core FY19E P/ABV (ascribing INR 40 per share to housing & insurance broking business) and we maintain ‘HOLD’.

Outlook
We repose faith in MMFS — strong brand, business relationships, geographical depth, product diversification — but volatile rural cash flows & earnings vulnerability keep us guarded. On better growth and controlled credit costs, we estimate >50% EPS CAGR over FY17-19E (on low base). But, RoE will be curtailed at <12% following capital raising (we have built in INR20bn). Maintain ‘HOLD/SU’ with TP of INR443 (3x core FY19E P/ABV).

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