M&M Fin to remain weak, like Shriram Transport: Antique

Dighant Haria, Antique Stock Broking says with the rural economy coming under on back lower social spending by government in last few quarters in terms of NREGA,  minimum support prices has impacted the M&M Financial third quarter numbers.Moreover, with the growth in rural economy expected to remain sluggish in the coming 4-5 quarters, M&M Financials will be under pressure for the coming 3-5 quarter. It is likely to be in Rs 250 and Rs 310 kind of band in next 3-6 months.The rural growth is likely to return only by FY17, he addsM&M Financial reported a poor third quarter results. The gross non-performing loans (NPLs) were at 5-year high versus sixteen quarter high in second quarter.The stock is sure to see further downside on aback of poor Q3 soft number.The house is upbeat on other NBFCs like SKS Microfinance, Shriram Transport, Shriram City Union and Repco Home Finance. The pain seen in M&M Fin may not percolate to these stocks, he adds. 

Below is the transcript of Dighant Haria’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: What do you do with the stock now after the earnings that you have seen this quarter? A: The stock has been under some kind of pressure since the last three quarters. If you go back to the history, 2012-2013 when other commercial vehicle financials were under stress, M&M Finance was reporting very strong set of numbers. That happened largely because the government was doling out the largest to the rural economy whether it is in terms of the higher minimum support prices or in terms of the NREGA scheme which was in full fledged implementation. So, the rural incomes grew at a very strong rate and Mahindra Finance was a prime beneficiary. In the last few three to four quarters the government has very consciously and steadily started cutting the social spending whether it is in terms of NREGA or in terms of support prices; we have seen that coming down. So the rural economy is definitely in some sort of a stress and we are seeing that in Mahindra Finance numbers. What happens is, all these economies follow a cycle so we at Antique have a view that this rural economy will continue to remain slow for say another four or five quarters and it is only in FY17 that we should see some kind of growth. So, M&M Finance’s financial performance should stay under pressure for at least three-five quarters to come. I think the stock goes no where, it is our view that the stock should be between the Rs 250-310 band for the next three to six months. So, we don’t expect anything meaningful to happen on the upside but however we believe that there is some kind of downside to the stock on the basis of these quarterly results.Latha: Would you extend this pessimism to any of the other NBFCs? What are your current buys and sells in that space? A: We are very positive on someone like Shriram Transport, Shriram City Union, SKS Microfinance, Repco Home Finance. Mahindra Finance is the only one amongst these large NBFCs who have exposure to a lot of farm income and the rural ecosystem. So, we don’t think that this pain necessarily percolates to someone like an SKS because SKS Microfinance customers are much smaller, they have an average ticket size of Rs 14,000 versus a Rs 2,00,000-3,00,000 for Mahindra Finance. So, that ecosystem is very much intact. The growth tailwind and the sector tailwind in microfinance is very much intact. So, I don’t think that this lower spending by the government in the rural economy affects SKS Microfinance in particular. Then there is someone like a Shriram Transport, a lot of it depends on the revival in the industrial economy. We have seen worst of the pain already with Shriram Transport. So, going ahead the pain for Shriram Transport, it is almost bottoming out and we should see some smart recovery going ahead. So, we believe that Shriram Transport is very well placed to play this cycle.Shriram City Union is an excellent proxy to consumer finance, largely two wheeler and SME. So, that has sufficient headroom to grow when the growth recovers in the economy. It has managed this entire cycle with an NPA of just 3 percent. You see someone like Mahindra go up from 3.5 percent two years back to something like 7.5-8 percent right now. So, I believe that there are counters which are quite insulated. So, Mahindra I would believe is the last one to fall but it will also be the last one to recover in this cyclical recovery that we expect in the coming two to three years. So, our top buys will remain Shriram Transport, Shriram City Union, SKS Microfinance and Repco Finance in the home finance space.