Emkay Global Financial's research report on Mahindra Finance
MMFS reported Q2FY23 earnings of ~Rs4.5bn, around 29% above our estimates due to lower-than-expected credit costs. Reversals in stages 2 & 3 provisions resulted in credit cost of ~1.1% vs our estimate of ~2.8%. Disbursements grew 24.8% QoQ/82.6% YoY, driven by the auto/UV (+32% QoQ), pre-owned vehicle (+25% QoQ) and SME/others (+81% QoQ) segments. The strong momentum sustained in Oct-22, with disbursement at Rs52.5bn vs Rs40.8bn in Sep-22. AUM grew 9.7% QoQ/13.8% YoY. Calculated yields declined 47bps QoQ, due to changes in asset-mix resulting in decline in share of higher-yielding products, introduction of better-quality albeit low-yielding customers to the portfolio for cash-flow stability, and lag in transmission of ~50bps rate hikes in some vehicle-finance products. CoFs rose 27bps QoQ, in line with our estimates. These factors, combined with high liquidity maintained by MMFS (~4-month buffer) on its books (25-30bps impact), resulted in calculated NIM decline of 68bps QoQ. Management believes yields will improve going ahead, once preowned vehicle availability improves and tractor sales pickup, for which the favorable season is around the corner. Opex remained elevated going into the festive period, with cost-toincome at 43.9% (Q1: 39.6%) due to higher business volumes and continued investments in technology. As a result, PPOP stood at Rs8.6bn (-8.7% QoQ/-15% YoY).
Outlook
We retain our HOLD rating on the stock with Sep-23E TP of Rs220/share (earlier Rs200), valuing the firm at 1.4x Sep-24E BVPS, using the excess return on equity for Sep-24E RoE of ~14%. Any downturn in rural demand presents a downside risk to our valuation. Upside risks include faster-than-expected pick-up in growth.
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