The recently concluded September quarter (Q2) was the third such of a weak show, whether operationally or in terms of loan growth or asset quality. Net profit declined by 18 per cent in Q2 over a year before, to Rs 78 crore. This is despite its net interest income (NII) growing by 16 per cent to Rs 911 crore. Provisioning for loan losses remained high, up 46 per cent year-on-year, eating into profit.
More troubling, non-performing assets (NPAs) only seem to be on the rise. While the March quarter tends to be traditionally the best in curbing this and in better profitability, Q2’s gross NPA ratio at 12.64 per cent is still too high, the highest in recent times. Even if one were to credit the financier for adopting tighter provisioning norms as stipulated by the Reserve Bank of India (RBI), 10.5 per cent as computed according to its earlier standard remains elevated, though better than a year-ago level of 11.2 per cent.
RBI has asked NBFCs to provide for loans that are overdue 90 days or more, as compared to the earlier requirement of 120 days or more, effective April 1, 2017. Still, absolute gross NPA by the earlier norm was Rs 5,131 crore in Q2, against Rs 4,748 crore a year before. So, the stress remains high, irrespective of NPA recognition norms. Profitability or net interest margin (NII/ assets under management) has also been gradually falling — from 8.6 per cent in FY16 to 7.5 per cent in Q2.
Loan growth, for now, is the only stable parameter, maintaining an increase of 14 per cent even in Q2. However, the quarter’s loan disbursements were relatively muted, due to adoption of the goods and services tax. This blip is expected to smoothen in the December quarter. Still, asset quality issues are beginning to eat into M&M Finance’s return profile. Return on equity (RoE), which peaked at 22 per cent in FY13, has been on a downward trajectory since, to a low of 6.4 per cent in FY17. Analysts expect the trend to reverse in FY18, pegging this at 11-12 per cent. Way below its peak and perhaps only a sign of bottoming out.
Yet, there is a chance that this expectation might also be missed in FY18, as the company has said it expects a 10 per cent gross NPA ratio. This entails Rs 4,600 crore of its loan assets (Rs 46,011 crore as on September 30) potentially turning bad in FY18, impacting its earnings and return ratios.
Interestingly, despite the lacklustre fundamentals, a majority of analysts remain positive on M&M Finance, terming it the best play for the rural theme. Justified to some extent, given the company’s longstanding ability to withstand downturn in rural market trends and staying committed to serving this segment by various financing products such as tractor loans, vehicle loans and lately even housing loans.
While this is positive, a speedy reversal in the asset quality trend is a must, to ensure the current rally is not fuelled only by hope or expectation. Also, for long-term investors to stay with the stock, the return profile needs sharp improvement, given the crowding of stocks in the financial sector space, most of them promising good return.
With M&M Finance planning for Rs 2,250 crore of capital raising, the terms of fund-raise will depend on the ability to get its house back in order. As the current year’s monsoon was good, the second one in a row, a trend reversal is likely. How soon M&M Finance will keep up its promise needs to be seen.