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M&M Financial Services Q1FY15 results update

July 28, 2014, Monday, 16:59 GMT | 11:59 EST | 20:29 IST | 22:59 SGT
Contributed by Nirmal Bang

Poor monsoon impacts asset quality

Mahindra & Mahindra Financial Services Ltd (MMFS) reported performance significantly below expectation on account of sharp rise in provisions. MMFS reported 19% YoY and 50.1% QoQ decline in PAT for Q1FY15. Margins declined led by higher slippages. Asset quality deteriorated resulting from delayed cash flows for farmers on account of poor rainfall. April and May witnessed lower efficiency while some pick up was seen in June.

- Slowdown in growth: AUM increased 16.0% YoY and stood flat at 0.4% QoQ to Rs 34,271 cr driven by growth in tractors and used vehicle segment. MMFS continues to shift focus from CV and construction equipment; consequently its share declined from 15% in FY14 to 14% in Q1FY15. Pre-owned vehicles witnessed growth and its share increased from 13% in FY14 to 14% in Q1FY15. Weak southern markets and deficient monsoon led to decline in disbursements. We expect loan growth to remain at around 18% for FY15-16E.

- Margins dip on account of interest reversals: Huge spike in slippages led to higher interest reversals which impacted margins during the quarter. However, lending rates have remained broadly stable and management does not foresee any decline in lending rates. Moreover, MMFS has been rated AAA stable by rating agencies which should reduce the borrowing cost. Going forward we believe that margins will witness improvement with focus on recoveries.

- Lower collection and weak monsoon impacts asset quality: MMFS witnessed sharp rise in asset quality as Gross NPA increased 44% YoY and stood at 6.2% (at levels which were last seen in FY10) vs 4.2% in Q1FY14 and 4.4% last quarter. Weak monsoon this year impacted the cash flows of the farmers. In addition to that, due to elections in this quarter, April and May witnessed lower working days and impacted collection efficiency of the company. Going forward, management intends to continue to focus on collection efforts and have guided for GNPA at around 5% levels which will still be higher than the historic levels. We have built in GNPA at 4.9% and NNPA at 2.0% for FY15E.

Going forward, growth is expected to witness slowdown as management intends to focus on recoveries rather than going aggressive on growth. Management has guided for improvement in asset quality in H2FY15E. We have factored in higher credit cost for FY15E taking into account weak monsoon and continued challenges in southern India. We expect PAT to grow at a CAGR of 12.6% over FY14-FY16E. At CMP, MMFS is trading at 14.08x FY15E and 11.71x FY16E EPS and 2.60x FY15E and 2.28x FY16E P/ABV. Considering that the concerns prevailing over the asset quality are unlikely to subside in near term, we have downgraded our rating on the stock from BUY to HOLD with target price of 257 (2.5x FY16E ABV); indicating an upside of 9.6% from current levels.