Hold M&M Financial; tgt of Rs 756

“Mahindra and Mahindra Financial Services Ltd. (M&MFSL), the preferred provider of financing services in the rural and semi-urban areas recorded whopping 45% profitability growth YoY exceeding expectations at Rs. 228crs for Q4 on the back of strong core income growth and lower provisions driven by the traction in rural sales and the vehicle finance disbursements. The full year PAT also observed strong growth of 34% at Rs. 620 crores coupled with 37% annual increase in Assets under management (AUM) to Rs. 20643 crs owing to growth in addressable market and pick-up in economic activity.”

“MMFSL recorded robust disbursement growth of 35% for FY12 backed by continued strong performance in vehicle and tractor segment (together contributing 46% to the total AUMs) in rural and semi-urban markets. While the asset financing for the cars and UVs was maintained, the financing of CVs and construction equipment segment witnessed strong growth. We expect the company to clock loan growth at 30% CAGR for the period FY12-14E. The margins for the full year have come down to 10.3% in FY12 from 11.7% in FY11, while sequentially the NIMs improved for Q4FY12 on account of increase in lending rates by the bank and securitized earnings. However, going ahead, we do anticipate margin pressures with the reversal in rate cycle.”

“The Company successfully maintained a low NPA rate and controlled delinquencies on the back of strong recoveries. Normally, the asset quality performs much better in the fourth quarter because of huge collection drive and year-end pressures. The GNPAs came down to 3% in Q4 from 4% in the corresponding quarter previous year and the credit costs fell sharply by 71% to Rs 14crs on sequential basis. On conservative side, we factor in rise in NPLs owing to macro-economic concerns. The provision coverage at the year-end remained strong at 78% but down from 86% a year before. The strengths of the company lie in the buoyancy in volumes in rural market and automobile financing market, diversified product mix and increase in dealerships. The earnings momentum going ahead is largely dependent upon continued spending by the Govt. and monsoons. We continue to remain less aggressive wrt growth owing to monsoon contingency and likely decent in return ratios and would prefer to wait for meaningful earnings growth with quality for further rerating. Therefore, we maintain HOLD rating on the stock with Target price of Rs.756, valuing the company at 2.1X P/ABV FY13E,” says Arihant capital markets research report.