Tuesday, October 28, 2014

>M&M Financial Services: Increased efforts on recoveries (CENTRUM)

Inline results; recovery efforts underway

MMFS' Q2FY15 results reflect the management’s positive efforts on recovery highlighted by mere 5% sequential increase in GNPA to Rs21.3bn (our / consensus estimates at +8-10%). Collections have improved and the management expects limited accretion to NPAs in H2FY15. Q2 NII at Rs7.4bn / net profit at Rs2.1bn were in line with estimates. AuM growth came in lower at 14.6% yoy and we have accordingly tweaked our estimates for FY15E. Well-diversified loan mix with improved reach and benign interest rate regime bode well for MMFS enabling it to leverage on growth opportunities during the auto industry up-cycle. Retain Buy with a revised target price of Rs325.

 Results in line with estimates: In MMFS’ Q2FY15 results, NII at Rs7.4bn (+9% yoy) and net profit at Rs2.1bn (-6% yoy) were largely in line with our estimates, though below consensus estimates. AuM grew 14.6% yoy, while value of assets (VoA) financed declined 7% in H1FY15. Recovery efforts as envisaged by the management resulted in limited accretion to bad assets during the quarter. GNPA at Rs21.3bn grew 5% sequentially vs 44% qoq increase in Q1’15 and 6% qoq increase in Q2’14. Our channel checks suggest NPA accretion was from CV’s especially the LCV segment and tractor portfolio.

 ■ Recovery efforts underway: Increased efforts on recoveries by the management in the past two-quarters seem to be working. Collection has improved 5-6% for the quarter and the management expects limited accretion to NPAs in H2FY15. In the up-cycle of FY09-13 GNPAs halved to 3.2%. This was partly supported by buoyancy in rural income. With focus on recoveries and balance sheet growth over FY16-17E, we expect overall GNPA (currently at 6.3% in H1FY15) to decline to 4.9% by end- FY17E. Provisioning coverage ratio at 53% was the only negative.

 ■ AuM grows 15% yoy; borrowings skewed towards bank route: Lower than expected AuM growth during the quarter could be attributed to the slow-pace of growth in auto industry. While segments of cars and tractors continue to see lower growth, MMFS has seen good traction in the pre-owned vehicle segment. Management expects AuM growth to gather momentum in H2FY15 and we have accordingly revised our FY15 estimates lower. With improved reach and respectable market share across all OEMs, MMFS is well-positioned to leverage on the growth opportunity. Borrowing mix remains skewed towards banks (~50%).

■ Valuation, view and key risks: We have tweaked our estimates and now factor in 18% CAGR in NII / 19% CAGR in profits over FY14-17E. Renewed thrust on recoveries (over balance sheet growth) will enable MMFS contain asset quality risk at comfortable levels. This, coupled with benign interest rate regime, will ensure stable margins and sustainable 2.8% / 19.2% (average) RoA / RoE over FY14-17E. We retain Buy with a revised target price of Rs325 (valued at 2.8x Sept’16E ABV). Failure on the recovery front or lower than expected pick-up in industry-wide auto volumes remains key risks.