Mahindra & Mahindra Financial: NPL raises its ugly head, no sign of a respite :: Kotak Securities

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NPL raises its ugly head, no sign of a respite. MMFS’ earnings were significantly
below expectations mainly because of a sharp (17% qoq) rise in NPLs and higher
provisions thereof. We believe the company will retain focus on recoveries as the
operating environment continues to pose challenges. We expect MMFS’ performance to
be muted in the medium term. We cut estimates; retain SELL with price target of `260

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Sharp rise in NPLs disappoints
Mahindra & Mahindra Financial (MMFS) reported 17% qoq and 65% yoy rise in gross NPLs to
`25 bn or 7.1% of loans. The company has failed to arrest delinquencies in its portfolio due to
weakness in the agriculture segment following a poor monsoon and stress in the commercial
transport segment. The management’s guidance remains cautious. We expect MMFS to retain
its focus on recoveries even as the macro-economic environment will pose challenges.
MMFS may limp to growth in FY2016
We believe MMFS will continue to go slow on new business and focus on recoveries to weather
challenges in its portfolio. While we did not find signs of respite in its 3QFY15 results, we are
hopeful MMFS will benefit from the commercial transport segment and agricultural collections
after the winter crops. We build in gradual improvement in loan-book growth from FY2016.
NPLs and credit costs will decline gradually but stay high, in our view. A decline in interest rates
will boost NIMs in FY2016E. We expect MMFS to deliver 12-17% growth in PBT before
provisions and 16-19% RoE over FY2015-17.
Valuations remain rich, retain SELL
We like the structural story of MMFS and believe MMFS offers a good long-term bet on rural
finance. Its recent branch additions will ensure that the company stays ahead of the
competition as large private banks increase rural penetration. While the stock has
underperformed, valuations remain rich and seem to ignore challenges in the business. We cut
estimates by 8-11% to factor higher credit costs and lower NII. After the disappointing
performance over the past nine months and specifically in 3QFY15, we expect the stock to
correct from these levels. We retain our SELL rating and target price of `260

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily19012015tn.pdf