M&M Financial Services -Results disappoint; challenges prevail :: Centrum

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Results disappoint; challenges prevail



MMFS' results reflect stress in rural economy visible in lower than
expected AuM growth, elevated levels of delinquencies following
delayed cash flows and lower profits. Q3’15 NII / net profit at
Rs7.4bn / Rs1.36bn respectively was lower than our / consensus
expectations. Management continues to focus on recoveries (over
growth) and we have accordingly revised our estimates lower. We are
now factoring in 15% / 17% CAGR in AuM / earnings over FY14-17E.
Valuations at 3.1x FY16E ABV / 2.6x FY17E ABV limit upside. Retain
Hold with a revised TP at Rs325.

$ Q3FY15 - Weak results: MMFS’ Q3FY15 results disappointed on both
operational and asset quality fronts. NII at Rs7.4bn (+9% yoy) was
lower than our / consensus estimates on the back of mere 11% yoy
growth in AuM and interest reversals following higher than expected
NPAs. Operating profit at Rs4.8bn grew 11% yoy (vs. our est. of 22%
yoy growth). Further, led by higher than expected delinquencies and
seasoning of NPAs, provisioning came in higher at Rs2.7bn (+50% yoy).
Net profit at Rs1.36bn declined 16% yoy. Value of assets financed
declined 8%.

$ Challenges on growth, asset quality prevail: Q3’15 AuM growth at
11.1% yoy, (lowest since Sept’09 and to our / consensus estimates),
mirrored auto industry volume growth and weak rural demand. While
management reaffirmed its focus on recoveries (collection efficiency
remained constant for two successive quarters), the seasonal nature of
business (Q3 tends to have higher NPAs) and delayed cash flows have
resulted in increased delinquencies. GNPA at 7.1% was the highest
since Dec’09. Q4 tends to witness moderation and with expectations of
improved cash flows, we expect GNPA to decline to 6.5% for FY15E.

$ Earnings revised downwards: With higher provisioning for the quarter
on the back of increased delinquencies, we have lowered our FY15E net
profit estimates by 10.8%. Challenges on AuM growth (across all
segments) and delayed cash flows (more of seasonal and due to decline
in prices), continue to impact growth and profitability. We have
accordingly revised our estimates lower by 4-5% for FY16E/FY17E
respectively and now build in 15% CAGR in loan / AuM each over
FY14-17E. Benign interest rate regime and pricing power will aid in
17% CAGR in NII / net profit each over the same timeframe.

$ Valuation, view and key risks: We had downgraded MMFS to Hold citing
rich valuations. While challenges on growth and asset quality prevail,
MMFS remains a play on revival in rural demand. This, coupled with
benign interest rate regime will ensure stable margins. Valuations at
3.1x FY16E ABV / 2.6x FY17E ABV in the context of 2.7% / 18.5%
(average) RoA / RoE over FY14-17E and longer than expected time
towards revival in rural demand, limit meaningful upsides in the near
term. Retain Hold with revised target price at Rs325 (valued at 2.8x
FY17E ABV). Prefer Sundaram Finance in the space. Key risks are
failure on the recovery front or lower than expected pick-up in
industry volumes.



Thanks & Regards,