Stock corner: Reaffirm ‘buy’ rating on Mahindra Fin Services

Mahindra & Mahindra Financial Services’ (MMFS) Q2FY20 performance was a mixed bag, with relatively stable asset quality but weak on operating performance with 1) AUM growth moderating to 18% y-o-y (down 1% q-o-q) and disbursement growth declining 10% y-o-y; and 2) ~10 bp q-o-q and +50 y-o-y drop in spreads/NIMs leading to just 4% y-o-y PPOP growth. GNPAs fell 2% q-o-q but this seems to be driven by higher write-offs as well. Hence, credit cost continued to remain elevated at >200 bp, despite the rundown in provision cover. Our near-term growth outlook for MMFS is muted. Owing to continued weak OEM volumes, we think it is unlikely that growth will pick that soon.

Valuations at 1.25x Sep-21 book look undemanding. Thus, we reaffirm our ‘buy’ rating on MMFS. We continue to prefer corporate private banks like ICICI/Axis Bank.

Asset quality performance stable after a weak Q1FY20. GNPAs fell 2% q-o-q to Rs 5,200 crore, with GNPA% declining to 7.2%. Contracts under NPA also reduced to 5.2%. While asset quality has not negatively surprised, we think the improvement is also led by higher write-offs that have led to reductions in both GNPAs and contracts under NPA.

Higher write-offs could explain some part of the moderation in provision cover to <20% vs 25% in Q1FY20. Credit cost, however, continues to remain elevated at >200bp given the weak environment.

AUM growth moderated further to 18% y-o-y (down 1% q-o-q), impacted by weak OEM volumes. We think AUM growth will continue to remain under pressure given the continued weakness in OEM volumes and lagged impact of weaker disbursement growth. Disbursement growth declined 10% y-o-y led by all segments seeing deceleration in growth momentum. Disbursements have weakened in cars, UV and a sharp decline in the used vehicles segment.