M&M Financial tanks 18% as high provisions dent Q4 profit

Mahindra & Mahindra Financial Services share price corrected 18 percent on May 18 as company reported a hit on March quarter profit due to high provisions.

The stock closed at Rs 137.75, down Rs 30.65 or 18.20 percent on the BSE and overall in last two months the stock broadly in a range.

Given the extended lockdown and difficulty for companies to operate, analysts expect weak growth in financial year 2020-2021, though recovery could be possible from second half of FY21. Hence some of them have buy rating while others have hold call on the stock.

"MMFS' business and asset quality performance, and consequently earnings were hit by COVID-19, despite Q4 being a seasonally strong quarter. Operating performance is likely to be subdued in the near term. Elevated provisions are likely to persist, weighing down on earnings," said HDFC Securities.

The brokerage feels a deep rural presence, capable collection infrastructure (as seen in the past) and relatively easy access to funds are positives. "Inexpensive valuations underpin our buy with a target of Rs 228."

M&M Financial reported a 60.5 percent YoY fall in Q4FY20 profit at Rs 233.8 crore, while net interest income increased 2.9 percent to Rs 1,303.3 crore and pre-provision operating profit grew by 23.9 percent to Rs 966.6 crore YoY.

HDFC Securities said in terms of asset quality, Q4FY20 performance was a departure from usual trends- gross non-performing assets (NPAs) at 8.4 percent were flat QoQ against the sharp improvement usually seen in Q4.

The brokerage expects asset quality to worsen as 75 percent of MMFS' book is under moratorium despite its rural focus. "We expect gross NPAs of around 10.4 percent by FY21."

Emkay Global had downgraded MMFS last month to hold from buy over concerns about slowing growth and deteriorating asset quality amid current COVID-19 crisis. Now it reiterated hold with a revised target of Rs 188 (Rs 202 previously).

"Current quarter performance of the company reflects the same along with subdued commentary. The company is well-placed on the liability franchise; however, we remain cautious on asset-quality trends," it said.

The brokerage cut its estimates by 6.7/2.3 percent for FY21/22 and have introduced FY23 to estimates.

MMFS reported around 21 percent YoY (around 27.5 percent QoQ) decline in disbursements across segments, resulting in weak AUM growth of around 15 percent YoY.

"The trend is likely to deteriorate further with stricter lockdown during Q1FY21. We expect AUM decline to remain further steeper now due to shorter tenure asset maturity cycle of the company," said Emkay.

Motilal Oswal has also baked in a 40 percent drop in disbursements in FY21 as first half of FY21 is likely to see a plunge (60–70 percent), but expects healthy, but gradual recovery from second half of FY21.

"With a higher share (75 percent) of moratorium availed and collections issues, repayment rates are likely to be lower and thus support AUM," said the brokerage which has a buy rating on the stock with a target of Rs 200 per share.

The brokerage feels forecasting asset quality and credit cost is challenging as they are likely to be guided by the easing of restrictions on COVID-19.

The Red zone contributes around 30 percent to AUM. "We have baked in around 3.9 percent credit cost versus 2.35 percent in FY20 (ex-contingency provisions).

Motilal Oswal expects a sharp drop of around 100bp in NIMs in FY21 due to challenging asset quality. It feels a valuation of 0.8x PBV largely factors in nearterm issues. "Recovery/upgrades are likely to be the quickest as restrictions ease, as the underlying customer base’s cashflows, especially in the Farming segment."

Date: May 19