M&M Financial Services - "Continued growth trajectory" :: LKP

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Auto sales in rural and semi urban markets have performed better than urban centres which is what led to the 34% growth in disbursements and 56% yoy growth in advances for MMFSL.Going forward liquidity pressure is likely to continue.However, broad based borrowings; ability to pass on costs to the end customer as well as above average monsoons will work in favour of the company. 

MMFSL has seen some pressure on asset quality during the quarter.However the management remains positive on the downward trend in npas and is positive that peak npa levels will not be breached. Gross npas were lower/higher by (5%)/23% yoy/qoq and net npas were higher by 10%/85% yoy/qoq. As a per cent gross npas were 4.6% v/s 6.9%/4% yoy/qoq and net npas were 1% v/s 1.3%/0.6% yoy/qoq. Credit costs have increased to 1.6% v/s 1.3% and the management has guided to maintain credit costs at 1.6%.

Ø  MMFSL reported a PAT growth of 42%/(35%) yoy/qoq. Operating income increased by 29%/(14%) yoy/qoq and operating profit increased by 26%/(20%) yoy/qoq.

Ø  Net interest income (NII) grew 27%/(16%) yoy/qoq and NIMs (gross) were 10% lower v/s 11.1%/12.1% yoy/qoq, Yields were lower at 16.2% v/s 16.6%/17.9% yoy/qoq. The company has retained 50-60bps of the cost hikes so as maintain asset quality over the next few quarters. Also yields are lower despite the 150 bps pass on of interest rates because the company has added low yielding products (which are likely to benefit through lower pressure on provisions) which distorts the product mix comparison over previous quarters. Interest expense to average assets increased to 6.2% v/s 5.5%/5.8% yoy/qoq.

Ø  Advances grew by 56%/13% yoy/qoq and AUM increased by 46%/5% yoy/qoq. The advantage of having a rural and semi urban presence through 559 branches has enabled the company to capture additional demand from auto OEMs (car loan book has increased 56%/(2%) yoy/qoq).New segment of commercial equipment (CE) has aided growth in the CECV segment by 108%/50% yoy/qoq. Tractors (growth on account of erstwhile Punjab tractors) and Auto/UV segments grew by 52%/9% yoy/qoq and 29%/8% yoy/qoq. The company has maintained discipline of 75% LTVs however improvement in cash flows (higher gold prices, multi employment programs and agri cashflows) have resulted in lower LTVs of 68-69%.

Ø  MMFSL has not securitized /assigned loans during the quarter.The management has indicated assignment in subsequent quarters will not add any benefit to cost of funds but only aid in churning of the portfolio. Lack of reliance on assignment (12% of borrowings) and lower opportunities in the MF and insurance market have increased he share of bank funding, which increased share to 58% of borrowings v/s 44%/57% yoy/qoq. Assignment transactions provided a 200-225 bps benefit on 12%-15% of the portfolio in the absence of which NIMs are likely to be impacted downwards. The NBFC’s D/E ratio increased from 4.0x v/s 3.8x/3.9x yoy/qoq.

Ø  MMFSL has added 72/12 branches yoy/qoq to reach a network of 559 branches.C/I ratios have increased  to 40% from 39%/36% yoy/qoq on account of higher employee costs higher by 42%/11% yoy/qoq and operating expenses 30%/(13%).

Valuations and Outlook

Although MMFSL’s disbursements and loan growth has continued its trajectory in Q1FY12, the slow down across industries is likely to impact rural cash flows and hence demand in subsequent quarters. Thus we remain cautious on growth and asset quality over FY12. Absence of assignment benefit (200-225 bps on 12-15% of the portfolio), higher cost of funds (175-200 bps) from banks (58% of borrowing mix) along with underlying concern in the macro environment could put pressure on MMFSL’s ability to pass on costs.  Thus we have tweaked our estimates to incorporate the above concerns and we revise downwards our P/ABV by from 2.75x to 2.5x. 

The stock trades at a P/ABV of 2.4x and 2.0x on our FY12E and FY13E ABV. We revise downwards our target from Rs.942 per share to Rs.799 per share.