M&M Financial - Raising estimates, Buy:: Anand Rathi

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M&M Financial Services
Raising estimates, target price; maintain Buy
 Raise estimates and target price. MMFS’ 2QFY11 profit rose
68.3% yoy, led by a strong NII (grew 36.7% yoy) and sharp
improvement in asset quality. Provisions, as a percentage of
average assets, were down 1.7% vs. average of 3.5% in the past
eight quarters. We raise our FY11-13e profit ~5% owing to lower
credit-cost assumptions.
 Robust loan growth across segments. Loans grew 33% yoy and
12.5% qoq to `102bn. AUM grew 32% yoy to `122bn.
Maintaining the past trend, auto/UVs, tractors and cars accounted
for +80% of disbursements in 2QFY11. We expect 25.6% CAGR
in MMFS’ loans over FY10-13e.
 Sequential improvement in spreads. NII grew 36.7% yoy
backed by strong loan growth and 40bps improvement in gross
spread to 11.5%.
 Sharp improvement in asset quality. Gross and net NPAs
declined 5% each qoq vs. loan growth of 12.5% in 2QFY11.
Provisions/write-off as a percentage of average assets sharply
declined to 1.7% vs. average of 3.5% in the past eight quarters.
Provision coverage ratio remained healthy at 83%, with net NPA
ratio at 1.1%. We expect structural improvement in asset quality to
continue on strong rural cash flow, keeping credit costs low.
 Valuation and risks. We raise our target price to `789 from `748
earlier. At our target price the stock will trade at a PBV of 3x
FY12e and 2.5x FY13e. Risks: Economic slowdown, regulatory
changes.