Rating: Hold; Target Price: Rs240; CMP: Rs254; Downside: 6%
Weak quarter; asset quality concern to drag stock performance
MMFS’ Q3FY14 results surprised negatively with a) weak operational
performance b) higher than expected rise in NPAs and c) bleak
prospects of growth and NPA management. Asset quality woes are
unlikely to recede and will warrant increased credit cost
provisioning. This, in addition to lower growth and margin pressures
will impact return ratios further. We have lowered our FY14/FY15 PAT
estimates by 11%/ 9% respectively, on the back of higher provisioning
and are now factoring in 18% CAGR in profits over FY13-16E. The stock
has underperformed the broad index in the past 1-month/ 6-months and
trades at 2.4x Dec’15E ABV of Rs105 which in our view seems reasonable
given relatively stable RoA profile when compared to its peers. Retain
HOLD with a revised target price of Rs240.
$ Challenging quarter: Q3FY14 NII at Rs6.7bn (+21% yoy) came in lower
than our/ consensus estimates and was led by interest reversal
(Rs400mn) on NPAs. Adjusted for this, growth was in line with
estimates. Asset quality surprised negatively with GNPA at Rs15.1bn,
+53% yoy and provisions at Rs1.8bn, +1.2x yoy. Net profit at Rs1.6bn
declined 18% yoy. NIM on AuM (calc) came in at 8.5% (-48bps qoq).
$ Asset quality woes unlikely to recede anytime soon: Management
attributed the reason for higher than expected increase in GNPA to a)
weak cash flows following delay in announcement of minimum support
price (MSP) in some pockets, b) stress in Southern India (45% of GNPAs
are from this region), c) migration of NPA into lower buckets and d)
repossession. While the trend is expected to reverse to a certain
extent in Q4FY14 (seasonally it has been a strong quarter). The
outlook on asset quality however remains bleak in H1FY15 given
seasonally weak quarters, growth slowdown and pain in southern India.
$ AuM grows +28% yoy, disbursements YTD +14% yoy: AuM growth at 28%
yoy was driven by segments of cars (+36% yoy), tractors (+28% yoy) and
refinancing (+64% yoy). Q3 disbursement growth at 8% yoy was from
tractors and refinancing. On liability, despite easing money market
rates, the proportion of bank loans continues to remain high at ~50%.
Incremental borrowing for the quarter was under bank loans and
commercial paper window (94%).
$ Weak asset quality outlook warrants earnings revision: In our recent
report, we highlighted that industry-wide auto volume slowdown and
pain in south India, will translate into lower growth and impact
margins for MMFS. Management guided that in addition to lower growth,
NPA concerns will stay elevated for few more quarters. This implies
increased credit cost provisioning and further pressure on return
ratios. We have thereby revised our credit cost assumptions upwards by
30bps (avg) to 1.6% and consequently lowered our earnings estimates.
We value MMFS at 2.3x Dec 15E ABV of Rs105 and arrive at a target
price of Rs240.
Thanks & Regards
--
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Weak quarter; asset quality concern to drag stock performance
MMFS’ Q3FY14 results surprised negatively with a) weak operational
performance b) higher than expected rise in NPAs and c) bleak
prospects of growth and NPA management. Asset quality woes are
unlikely to recede and will warrant increased credit cost
provisioning. This, in addition to lower growth and margin pressures
will impact return ratios further. We have lowered our FY14/FY15 PAT
estimates by 11%/ 9% respectively, on the back of higher provisioning
and are now factoring in 18% CAGR in profits over FY13-16E. The stock
has underperformed the broad index in the past 1-month/ 6-months and
trades at 2.4x Dec’15E ABV of Rs105 which in our view seems reasonable
given relatively stable RoA profile when compared to its peers. Retain
HOLD with a revised target price of Rs240.
$ Challenging quarter: Q3FY14 NII at Rs6.7bn (+21% yoy) came in lower
than our/ consensus estimates and was led by interest reversal
(Rs400mn) on NPAs. Adjusted for this, growth was in line with
estimates. Asset quality surprised negatively with GNPA at Rs15.1bn,
+53% yoy and provisions at Rs1.8bn, +1.2x yoy. Net profit at Rs1.6bn
declined 18% yoy. NIM on AuM (calc) came in at 8.5% (-48bps qoq).
$ Asset quality woes unlikely to recede anytime soon: Management
attributed the reason for higher than expected increase in GNPA to a)
weak cash flows following delay in announcement of minimum support
price (MSP) in some pockets, b) stress in Southern India (45% of GNPAs
are from this region), c) migration of NPA into lower buckets and d)
repossession. While the trend is expected to reverse to a certain
extent in Q4FY14 (seasonally it has been a strong quarter). The
outlook on asset quality however remains bleak in H1FY15 given
seasonally weak quarters, growth slowdown and pain in southern India.
$ AuM grows +28% yoy, disbursements YTD +14% yoy: AuM growth at 28%
yoy was driven by segments of cars (+36% yoy), tractors (+28% yoy) and
refinancing (+64% yoy). Q3 disbursement growth at 8% yoy was from
tractors and refinancing. On liability, despite easing money market
rates, the proportion of bank loans continues to remain high at ~50%.
Incremental borrowing for the quarter was under bank loans and
commercial paper window (94%).
$ Weak asset quality outlook warrants earnings revision: In our recent
report, we highlighted that industry-wide auto volume slowdown and
pain in south India, will translate into lower growth and impact
margins for MMFS. Management guided that in addition to lower growth,
NPA concerns will stay elevated for few more quarters. This implies
increased credit cost provisioning and further pressure on return
ratios. We have thereby revised our credit cost assumptions upwards by
30bps (avg) to 1.6% and consequently lowered our earnings estimates.
We value MMFS at 2.3x Dec 15E ABV of Rs105 and arrive at a target
price of Rs240.
Thanks & Regards
--
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