Tailwind ahead for M&M Financial Services as asset quality improves

 

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  Mahindra and Mahindra Financial Services (M&M Financial) reported a good December quarter (Q3) because of growth in its core business, led by an improvement in asset quality.

 

Besides a 44 per cent year-on-year (y-o-y) surge in net interest income, its non-performing assets (NPAs) declined in Q3. Helped by a 53 per cent y-o-y decline in provisioning for loans, the company reported a net profit of Rs 3.42 billion (standalone operations) in Q3, against a loss of Rs 156 million in the year-ago quarter. After excluding the income from a stake sale in a subsidiary worth Rs 650 million, the company’s profit was ahead of estimates.

However, the stock was down 13 per cent after the results were announced last month. One of the reasons is that the stock had almost doubled last year and the market sentiment was subdued. On the other hand, the business environment remains steady.

During the last couple of years, the company witnessed subdued performance due to feeble rural sentiment amid poor rainfall and subdued crop prices. However, rural sentiment has improved, which was reflected in the company’s Q3 results.

“A good monsoon and harvest have helped the company report better recoveries and this trend is going to continue for a couple of quarters, thereby driving its earnings growth,” an analyst at a domestic brokerage said.

Analysts at Motilal Oswal Securities said the revival in the rural economy would enable M&M Financial to increase recoveries further along with its earnings and asset quality. “Over the last three quarters, there have been signs of a turnaround in the economic cycle. In this business, growth and asset quality improvement move in tandem. With the rural economy improving, growth is expected to pick up and at the same time, credit costs shall decline sharply,” they said.

The improvement in rural infrastructure augurs well since the company deals in the financing of tractors, utility vehicles and commercial vehicles. “In the last few years, infrastructure activities were not at the expected level. However, given a pick-up in these activities, coupled with a good monsoon and harvest, FY19 is expected to be good for the company,” said Pritesh Bumb, analyst at Prabhudas Lilladher.

Moreover, the rural focus in the Budget should lead to increased farm incomes and, in turn, earnings for companies such as M&M Financial. Similarly, the positive momentum shown by the automobile industry will also help M&M Financial to clock faster growth in loans. Over time, the company has been diversifying its portfolio and includes SME financing and housing finance. The key near-term risk is the rise in domestic interest rates, which could affect most financing companies.

Given the prospects, many analysts have a ‘buy’ rating for the stock, indicating a potential upside of 20 per cent.