Mahindra & Mahindra Financial Services (MMFS IN) Rating: ACCUMULATE CMP: Rs401 TP: Rs516

Transcription

1 Mahindra & Mahindra Financial Services (MMFS IN) Rating: ACCUMULATE CMP: Rs401 TP: Rs516 October 24, 2018 Q2FY19 Result Update Change in Estimates Target Reco Change in Estimates Current Previous FY20E FY21E FY19E FY20E Rating ACCUMULATE ACCUMULATE Target Price NII (Rs.) 45,394 53,542 50,345 60,388 % Chng. (9.8) (11.3) PPoP (Rs.) 30,169 36,348 32,612 39,932 % Chng. (7.5) (9.0) EPS (Rs.) Key Financials FY18 FY19E FY20E FY21E Net Int.Inc. (Rs m) 39,149 45,394 53,542 64,267 Growth (%) Op. Profit (Rs m) 25,343 30,169 36,348 44,639 PAT (Rs m) 8,269 12,474 15,867 19,335 EPS (Rs.) Gr. (%) Margin (%) RoAE (%) RoAA (%) PE (x) P/BV (x) P/ABV (x) All Nos. are in INDAS Key Data MMFS.BO MMFS IN 52-W High / Low Rs.538 / Rs.343 Sensex / Nifty 34,034 / 10,225 Market Cap Rs.248bn/ $ 3,383m Shares Outstanding 618m 3M Avg. Daily Value Rs m Shareholding Pattern (%) Promoter s Foreign Domestic Institution Public & Others 8.85 Promoter Pledge (Rs bn) Stock Performance (%) 1M 6M 12M Absolute 2.1 (21.3) (4.4) Relative 8.9 (20.0) (8.4) Shweta Daptardar shwetadaptardar@plindia.com Robust earnings Quick Pointers: Other income spike, lower provisioning and stark improvement in asset quality Credit costs on normalization mode, liquidity positioning healthy Beating earnings estimates, MMFS recorded 132.5% YoY/41.7% QoQ growth in PAT at Rs 3.8bn (PLe: Rs 2.7bn) on the back of sharp rise in other income and lower provisioning led by meaningful improvement in asset quality. Higher dividend income from subsidiaries (Rs 200mn) and investment gains coupled with robust AUM growth of 26% YoY led to healthy operating profit growth (65.9% YoY/11.5% QoQ). While margins (calculated) uptick stood higher at 7.9% (up 37bps QoQ), the same should marginally soften on account of absorption of funding pressures but (expected to stabilize at 7.6% NIMs for FY20-21 given the pricing power and deeper penetration across products and geographies. Being cautiously optimistic we build in 17% AUM growth into our FY19 estimates underpinned by stronger availability of funds on back of rich promoter backing, anticipated seasonally strong 2H and improving portfolio quality. With operating leverage already in place, bettering rural cash flows and therefore normalization of credit costs (expect steady1.8% over FY20-21, Q2FY19: 1.7%) should help deliver RoAs at 2.4% by FY21. We retain ACCUMULATE, introduce FY21 estimates & roll-over TP to Sep-21 ABV at Rs 516(earlier Rs 543) valuing at 3.1x inclusive of subsidiaries value Rs 80. Growth story intact: Defying current market turmoil, MMFS strong yet in-line UAM growth at 26% YoY largely driven by used and tractor segment. While rural recovery has augured well, strengthening of market position in non- Mahindra business and branch accretion has compensated for pressures in certain geography (pockets of Maharashtra). With seasonality and diminishing pressures in place for H2, we envisage 17% AUM growth for FY19, stabilizing at 18% over FY20-21E. Operational metrics on roll: Improving higher yielding mix and sustenance of leadership in M&M/Maruti (esp. rural side) aided yields expansion to 14%+ for the quarter gone by. While funding costs stood almost flat QoQ at 8.36%, the same should move north of 9% by year-end given the elevated market rates. Betetr yeidls, lower interest reversals, IND AS income recognition aided bestin-class NIMs at 7.9% (calculated on AUM), up 37 bps QoQ for Q2FY19, however, the same should decelerate only to stabilize at 7.6% over FY20-21E with rate transmission across certain loan products and sustenance of stronger liquidity buffer. Operating leverage trends should sustain with opex/assets to stay at 2.7%+ over next two years. Normalization of credit costs to aid RoA sustenance: With elevated provisioning days behind, portfolio quality drastically improving (NPA down 350 bps YoY to 9%, credit costs down to 1.67% vs 2.25: Q1FY19), backed by rural recovery, expect GNPA to decline to 5.6%, credit costs stabilizing at 1.8% by FY21E in turn aiding healthy earnings profile. Against this backdrop, we believe the company should clock 25% earnings CAGR over FY19-21E resulting into RoAs at 2.4% and RoEs closer to 17%. Subsidiaries performance remain intact barring certain pressures on rural housing portfolio where we slightly trimmed our growth estimates. October 24,

2 earnings MMFS Q2FY19: Other income spike and lower provisions drove (Rs m) IND-AS IND-AS YoY gr. IND-AS QoQ gr. Q2FY19 Q2FY18 Q1FY19 Interest Income 21,033 15, % 19, % Interest Expenses 9,367 7, % 8, % NII (incl. securitisation) 11,666 7, % 10, % Other Income % % Total Income 12,117 8, % 10, % Total Operating Expenses 4,248 3, % 3, % Operating Profit (PPoP) 7,869 4, % 7, % Provisions & Write Offs 2,311 2, % 2, % PBT 5,558 2, % 4, % Reported Profit 3,814 1, % 2, % Assets Under Management 594, , % 587, % NIM - Calculated 7.90% 6.55% 1.4% 7.53% 0.37% AUM (Rs m) 554, , % 552, % Auto/ Utility vehicles 138, , % 149, % Tractors 94,319 74, % 93, % Cars / Others 116,511 97, % 121, % Commercial Vehicles 83,222 52, % 77, % Used vehicles & Others 44,385 92, % 110, % Asset Quality Gross NPAs 64,870 62, % 55, % Net NPAs 32,340 30, % 25, % Gross NPA (%) 9.00% 12.50% -3.5% 9.75% -0.7% Net NPA (%) 5.51% 6.19% -0.7% 4.56% 0.9% Coverage (%) 50.15% 50.92% -0.8% 54.50% -4.4% Credit costs - On Loans 1.67% 1.94% -0.3% 2.25% -0.6% Balance sheet Details Total Borrowed Funds 483, , % 413, % Loans & Advances & others 554, , % 522, % Total Assets 594, , % 557, % October 24,

3 MMFS Key Q2FY19 Concall Highlights: Market Positioning: MMFS foresees no competition in the market it operates, be it from private banks or other NBFCs in light of current liquidity turmoil. Branches Smart branch addition, increased dealer presence, set-up of new verticals aiding maintenance of leadership positioning. Growth Growth: Calibration on growth not on cards as sufficient funding sources available given the strong parentage, matched liability profile, yet MMFS stands cautious with planned growth strategy in place. Aims 19-20% YoY growth on the back o rural recover, better than average monsoon, GoI spending during the election phase and asset quality woes being behind. While certain pockets of Maharashtra observed slower performance with cash flows expected to pick-up in 2H in-line with harvests, other states of North east (UP, Bihar) stand aggressive w.r.t growth rate, parts of South standing ( Telangana, AP) buoyant, and Kerala bouncing back after floods On the product segments side, MMFs continues to maintain market share in M7M/Maruti business vertical, moreover, non-mahindra tractor business, old tractor segment, and autos have put up healthy traction; car and 2Ws stood tad weaker (insurance costs for 2W impacting cash purchases but not the financing business). Margins/Spreads: Yields remain much comfortable and no pressure seen in medium term and yield range would remain ranged at %, however company hinted of funding cost pressures surpassing 9% levels but the ability to transmit higher rates in certain products/geographies coupled with dealers absorption, spreads should not compress beyond desirable levels. Liquidity scenario: No liquidity pressure on balance sheet, zilch rejections from funding sources (banks/mfs) and cumulative surplus (as % of outflow) standing at ~130% in the early bucket (1 month) as against prescribed limits of (-15%). October 24,

4 3Q14 4Q14 1Q15 2Q15 Mahindra & Mahindra Financial Services AUM growth of 26% YoY onm expected lines AUM growth YoY 30% 25% 20% 15% 10% 5% 0% vehicles 50% 40% 30% 20% 10% 0% -10% -20% Disbursements were strong led by pre-owned Disbursement growth YoY 3Q14 4Q14 1Q15 2Q15 AUM mix - mix tilted towards CV/CE & SME segments Auto/UVs Tractors Cars CV/CE Used vehicles & Others 15% 15% 15% 16% 16% 16% 15% 17% 14% 17% 17% 21% 18% 20% 20% 8% 13% 13% 13% 12% 12% 12% 13% 13% 13% 15% 13% 13% 12% 13% 14% 14% 23% 23% 23% 23% 24% 24% 24% 23% 24% 23% 23% 22% 23% 21% 22% 22% 19% 18% 18% 18% 17% 17% 17% 17% 18% 17% 17% 17% 18% 17% 17% 17% 30% 31% 31% 31% 31% 31% 31% 30% 31% 30% 30% 28% 28% 27% 27% 25% AUM Mix Trends Disbursements steady across all segments Auto/UVs Tractors Cars CV/CE Used vehicles & Others 18% 18% 19% 21% 20% 19% 28% 23% 13% 7% 9% 29% 19% 25% 17% 15% 15% 30% 9% 10% 12% 9% 13% 11% 11% 13% 18% 19% 11% 19% 14% 25% 25% 24% 22% 23% 15% 22% 21% 22% 21% 15% 21% 22% 22% 21% 19% 15% 16% 14% 17% 17% 12% 17% 25% 19% 9% 21% 18% 17% 21% 20% 14% 19% 35% 33% 31% 31% 31% 27% 29% 27% 28% 28% 28% 26% 27% 24% 25% 25% Quarterly Disbursement Mix Trends October 24,

5 reversals Margins saw uptick on high yielding products, lower interest 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% NIMs on AUM 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Yields have improved on high yielding products and cost of funds have begun witnessing pressures 14.9% 15.5% 15.4% 16.6% 14.6% 15.0% Yields on AUM 14.2% 16.5% 13.2% 14.0% Cost of Funds 1Q15 2Q % 15.8% 12.6% 12.7% 14.8% 15.3% 13.5% 14.2% 9.9% 10.0% 10.0% 9.7% 9.4% 9.3% 9.2% 8.8% 8.9% 8.8% 8.8% 8.2% 8.5% 7.9% 8.1% 7.8% 8.3% 8.4% ROA tree On AUM basis should see 2.5% RoA, 17%+ RoE ROE Decomposition FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Net Interest Income/AUM 8.1% 7.8% 7.7% 7.3% 7.7% 7.6% 7.6% 7.8% Fees/AUM 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Net revenues/aum 8.9% 8.7% 8.4% 7.7% 8.1% 7.9% 7.9% 8.0% Operating Expense/AUM 2.9% 2.8% 3.0% 3.3% 2.8% 2.7% 2.6% 2.5% Provisions/AUM 1.6% 2.3% 2.7% 3.0% 2.4% 1.9% 1.8% 1.8% Taxes/AUM 1.5% 1.2% 0.9% 0.5% 0.9% 1.1% 1.2% 1.2% ROA 2.9% 2.3% 1.7% 0.9% 1.9% 2.3% 2.4% 2.5% Equity/AUM 15.4% 15.2% 15.1% 14.3% 15.5% 16.2% 15.0% 14.0% ROE 18.6% 15.5% 11.4% 6.4% 12.3% 14.3% 16.3% 17.8% October 24,

6 We maintain ACCUMLATE with TP of Rs516 (from Rs543) based on 3.1x P/ABV Sep-21 on rollover from Mar-20 Fair price EVA 301 Fair price - P/ABV 571 Average of the two 436 Subsidiary Value 80 Target Price 516 Target P/ABV 3.1 Target P/E 16.9 Current price, Rs 401 Upside (%) 31% Dividend yield (%) 1% Total return (%) 32% October 24,

7 Income Statement (Rs. m) Int. Inc. / Opt. Inc. 72,891 88, , ,362 Interest Expenses 32,321 41,995 50,380 59,703 Net interest income 39,149 45,394 53,542 64,267 Growth(%) Non-interest income Growth(%) (7.2) 35.0 (2.0) 10.0 Net operating income 39,740 46,191 54,323 65,126 Expenditures Employees 8,518 9,795 11,265 13,067 Other Expenses 5,437 5,763 6,224 6,908 Depreciation Operating Expenses 13,954 15,558 17,488 19,975 PPP 25,343 30,169 36,348 44,639 Growth(%) Provisions 12,266 11,270 12,307 15,120 Profit Before Tax 13,077 18,900 24,041 29,519 Tax 4,809 6,426 8,174 10,184 Effective Tax rate(%) PAT 8,269 12,474 15,867 19,335 Growth(%) Balance Sheet (Rs. m) Source of funds Equity 1,229 1,229 1,229 1,229 Reserves and Surplus 91,802 99, , ,468 Networth 93, , , ,697 Growth (%) Loan funds 394, , , ,114 Growth (%) Deferred Tax Liability Other Current Liabilities Other Liabilities 56,612 60,353 64,433 68,825 Total Liabilities 543, , , ,636 Application of funds Net fixed assets 1,197 1,221 1,245 1,270 Advances 510, , , ,094 Growth (%) Investments 18,732 20,605 22,665 24,932 Current Assets 5,199 8,454 6,657 7,171 Net current assets 5,199 8,454 6,657 7,171 Other Assets 8,508 9,001 9,567 10,168 Total Assets 543, , , ,636 Growth (%) Business Mix AUM 551, , , ,601 Growth (%) On Balance Sheet 517, , , ,810 % of AUM Off Balance Sheet 7,334 7,995 9,170 10,715 % of AUM Profitability & Capital (% of Avg. Assets) NIM ROAA ROAE Source: Company Data, PL Research All Nos. are in INDAS Quarterly Financials (Rs. m) Y/e Mar Q3FY18 Q4FY18 Q1FY19 Q2FY19 Int. Inc. / Operating Inc. 18,340 20,600 19,259 21,033 Income from securitization Interest Expenses 7,629 7,550 8,488 9,367 Net Interest Income 10,711 13,050 10,771 11,666 Growth (%) Non-Interest Income Net Operating Income 10,835 13,188 10,909 12,117 Growth (%) Operating expenditure 4,282 4,927 3,849 4,248 PPP 6,553 8,261 7,061 7,869 Growth (%) Provision 1,989 1,572 2,938 2,311 Exchange Gain / (Loss) Profit before tax 4,563 6,688 4,122 5,558 Tax 1,793 2,443 1,432 1,744 Prov. for deferred tax liability Effective Tax Rate PAT 2,770 4,245 2,691 3,814 Growth (1,869) AUM 517, , , ,730 YoY growth (%) Borrowing 370, , , ,055 YoY growth (%) Key Ratios CMP (Rs) EPS (Rs) Book value (Rs) Adj. BV(Rs) P/E(x) P/BV(x) P/ABV(x) DPS (Rs) Dividend Payout Ratio(%) Dividend Yield(%) Asset Quality Gross NPAs(Rs m) 50,419 49,186 48,364 47,394 Net NPA(Rs m) 33,258 31,774 30,953 29,384 Gross NPAs to Gross Adv.(%) Net NPAs to net Adv.(%) NPA coverage(%) Du-Pont (% of AUM) NII NII INCI. Securitization Total income Operating Expenses PPOP Total Provisions RoAA Avg. Assets/Avg. net worth RoAE Source: Company Data, PL Research All Nos. are in INDAS October 24,

8 Price Chart Recommendation History (Rs) Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 No. Date Rating TP (Rs.) Share Price (Rs.) 1 26-Oct-17 Accumulate Jan-18 Accumulate Jan-18 Accumulate Apr-18 Accumulate Apr-18 Accumulate May-18 Accumulate Jul-18 Accumulate Oct-18 Accumulate PL s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly October 24,

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