New York: 22:15 || London: 03:15 || Mumbai: 06:45 || Singapore: 09:15

Recommendations India

M&M Financial Services Q4FY14 results update

April 25, 2014, Friday, 14:29 GMT | 09:29 EST | 17:59 IST | 20:29 SGT
Contributed by Nirmal Bang

Mahindra & Mahindra Financial Services Ltd (MMFS) reported better than expected performance in Q4FY14. Margins improved led by lower slippages. Asset quality witnessed sharp improvement reflecting increased efforts on collections and recoveries. MMFS has now paced down repossessing assets and have started focusing more on collection efforts which has resulted in marked improvement in asset quality. MMFS reported 6.9% YoY decline in PAT for Q4FY14 reflecting higher provisions and tax rate. However, on QoQ basis PAT increased 89.3% as lower provisions boosted bottom line performance. The company has declared dividend of Rs 3.8 per share.

- Loan growth continues to remain healthy: AUM increased 22.3% YoY (3.9% QoQ) to Rs 34,133 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 14% in FY13 to 11% in FY14. Southern markets witnessed a de-growth during FY14; despite this the loan growth has remained steady for MMFS. As per the management, Southern markets excluding Tamil Nadu have now started showing positive signs which should help MMFS in maintaining its growth momentum going forward as well. We expect loan growth to remain healthy at around 21% for FY15-16E.

- Margins to remain stable: Lower slippages led to improvement in margins during the quarter. Going forward we believe that margins at current levels should remain sustainable.

- Strong collection efforts yields in better asset quality: MMFS witnessed marked improvement in asset quality as Gross NPA declined 7.2% QoQ and stood at 4.4% vs 4.8% last quarter. Persistent collection efforts taken by the sales force has resulted in higher recoveries. Going forward, management intends to continue to focus on collection efforts rather than going aggressive and repossessing the assets. We believe that the collection efforts of the company coupled with expected recovery in the overall commercial vehicle industry in FY15E will yield in better performance on the asset quality front. We have built in GNPA at 4.1% and NNPA at 1.8% for FY15E.

Going forward, growth looks sustainable at current levels with stable margins. For the last one quarter, concerns over asset quality have weighed high on the stock and as a result the stock has remained under pressure. With concerns over asset quality easing out, the stock may outperform in the near term. However, in the long term sustainable performance on asset quality would be the key factor to be watched out for. We expect PAT to grow at a CAGR of 18.3% over FY14-FY16E. At CMP, MMFS is trading at 13.16x FY15E and 11.11x FY16E EPS and 2.59x FY15E and 2.26x FY16E P/ABV. We recommend BUY with target price of 298 (2.75x FY16E ABV); an upside of 21.7% from current levels.