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Recommendations India

Mahindra & Mahindra Q3FY14 results update

January 24, 2014, Friday, 09:38 GMT | 05:38 EST | 15:08 IST | 16:38 SGT
Contributed by Nirmal Bang

Mahindra & Mahindra Financial Services Ltd (MMFS) Q3FY14 performance was significantly below expectations. Margins witnessed decline led by interest reversal and higher borrowing cost. Higher provisions dented bottom line performance. Asset quality deteriorated significantly resulting from delayed cash flows for farmers in Maharashtra and Madhya Pradesh leading to shift in recovery. Moreover MMFS aggressively repossessed, sold and booked losses in the MHCV segment where stress is visible.
- Loan growth continues to be strong: AUM increased 28.1% YoY (5.5% QoQ) to Rs 32,858 cr driven by growth in tractors and used vehicle segment. MMFS continues to shift focus from the Commercial vehicle and construction equipment segment and its share declined from 14% in Q3FY13 to 11% in Q3FY14. Despite a de growth in the Southern regions, MMFS has maintained a steady growth rate mainly driven by Northern regions. Going forward, this trend is expected to continue and we expect 24% loan growth for FY14E.
- Margins to remain stable: MMFS witnessed decline in margins led by interest reversal of Rs 40 cr on account of higher slippages and 30 bps increase in cost of funds. However, management does not foresee any significant impact on margins going forward and has stated that it will maintain the current lending rates which should aid margins.
- Asset quality under stress: MMFS witnessed sharp deterioration in asset quality as Gross NPA spiked 24% QoQ on account of stress in the CV portfolio and southern markets. Moreover, the recoveries which generally come in Q3 (historic past trend) from MP and Maharashtra has shifted to Q4FY14 due to elections and late announcement of MSP for soya, cotton and paddy crops leading to lag of cash flow in the hands of the farmers. Going forward, with recovery in these states as well as southern states (as harvests picks up in mid Jan) management expects improvement in asset quality.
Going forward, growth looks sustainable at current levels with stable margins. Asset quality is the key moniterable factor to be watched out for. Although management expects easing of stress in asset quality from Q4FY14E, we do not foresee a significant improvement immediately and believe that improvement in asset quality would be gradual and more visible in FY15E. In our view, asset quality concerns would remain an overhang on the stock in the near term. Based on these concerns and poor Q3FY14 results we have revised our FY14E estimates downwards with increase in credit cost. We now expect 3.9% growth in PAT (vs 19.5% earlier) for FY14E. Overall we expect PAT to grow at a CAGR of 12.8% over FY13-FY15E. At CMP, MMFS is trading at 15.06x FY14E and 12.30x FY15E EPS and 3.02x FY14E and 2.55x FY15E P/ABV. We recommend investors to HOLD the stock for a target price of Rs 265; an upside of 10.3% from current levels.