M&M Financial Services - "Results in line, remain cautious on impending regulatory changes": LKP

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Auto sales in rural and semi urban markets continue to perform better than urban centres which are what led to the 54% yoy growth in advances for MMFSL. Rising rates has impacted the automotive segment and the company is trying to reduce impact through tie ups with OEMs and taking advantage of its diversified product line. 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 continued to improve asset quality and the management remains positive on the downward trend in npas. Gross npas were lower by 1%/1.3% yoy/qoq and net npas were higher by 40%/20% yoy/qoq. As a per cent gross npas were 4% v/s 5.8%/4.6% yoy/qoq and net npas were 1% v/s 1.1%/1% yoy/qoq. The lower PCR is more function of write offs of previous npas (attracting higher provisions) and additions attracting lower provisions. 

Ä     MMFSL reported a PAT growth of 16%/33% yoy/qoq. Operating income increased by 24%/17% yoy/qoq and operating profit increased by 22%/22% yoy/qoq.

Ä     Net interest income (NII) grew 23%/18% yoy/qoq and NIMs (gross) were 10.2% lower/ marginally higher v/s 11.5%/10% yoy/qoq, Yields were higher lower at 16.5% v/s 16.2% qoq and lower v/s 17% yoy. The company had increased lending rates by 100 bps at the end of June 2011 quarter. Yields are also a function of the product mix, lower share of high yielding products such as tractors (however impact on RoE is expected to be minimal as benefit accrues through lower pressure on provisions) is replaced by new products such as construction equipment and commercial vehicles (CE/CV). Interest expense to average assets increased to 6.3% v/s 5.5%/6.2% yoy/qoq. MMFSL is in talks with various OEMs to avail of subventions and over the next 2 quarters there is likely to be some benefit through this route.

Ä     Advances grew by 54%/10% yoy/qoq and AUM increased by 57%/12% yoy/qoq. The advantage of having a rural and semi urban presence through 570 branches has enabled the company to capture additional demand from auto OEMs (car loan book has increased 63%/12% yoy/qoq).  MMFSL is close to funding 9000 vehicles of Maruti per month (consisting of 80% of the total figure) and is marginally short of SBI with regard to financing for Maruti cars is concerned. Although the company is impacted by the slow down in production of Maruti cars, it has managed to replace product line with other OEMs. New segment of CE has aided growth in the CECV segment by 116%/23% yoy/qoq. Multi application of tractors and cash flows in rural and semi urban regions has converted tractor and Auto/UV segments growth to 43%/(4%) yoy/qoq and 48%/19% yoy/qoq. The company has maintained LTVs between 72- 75% LTVs.

Valuations and Outlook

The stock trades at a P/ABV of 2.5x and 2.1x on our FY12E and FY13E ABV. MMFSL continues to deliver strong numbers in disbursement and loan book growth. The management has also been proactive to diversify itself over OEMs and product lines.The company has built a specialised business model and we believe that the benefit of this differentiated model would continue to give it an edge over peers in the financial services space. However, we remain cautious of the regulatory changes, rising interest rate environment and slow down in the automotive segment. Although MMFSL has an edge through its differentiated business model, possible implementation of the recommendations of the Usha Thorat committee would reduce the benefits enjoyed across the NBFC sector. We have retained our multiple and target price. However would revise our outlook based on any regulatory changes that could be implemented in the medium term.