M&M Finance Q3 gets thumbs up despite sluggish disbursements; stock up 8%

Despite sluggish disbursements on a yearly basis in December 2019 quarter (Q3) and higher provisioning amid sagging automobile and the overall economy, the stock of Mahindra and Mahindra Financial Services (M&MFS) gained about 8 per cent intraday on Wednesday. While this was also partly supported by the overall bullish markets (BSE Sensex was up 0.7 per cent), improved operating performance and expectations of some recovery in rural demand has led to investor sentiments turning positive. The rural-focused vehicle financier announced its Q3 results on Tuesday post market hours.

Though the overall disbursements fell by around 4 per cent year-on-year, they were up 31 per cent sequentially due to the festive demand. However, even as disbursements were down year-on-year, M&MFS' operating profits before provisioning grew by 19.3 per cent year-on-year to Rs 888.3 crore against analyst expectations of Rs 793 crore as per the Bloomberg consensus estimates. This was mainly driven by stringent cost control. The company’s cost to income ratio in Q3 contracted by 239 basis points year-on-year and 194 basis points sequentially to 37 per cent. M&MFS has achieved cost savings of Rs 25-30 crore during the quarter with process changes and automation.

Though the near term growth story still looks challenging for vehicle financiers, some analysts expect rural economy to recover, which would augur well for M&MFS given around 90-95 per cent of its vehicle financing business comes from rural areas. For instance, analysts at JM Financial believe that M&MFS will be a beneficiary of rural recovery driven by higher Rabi crop output, food price inflation, higher government spending post Budget and benign competitive environment going forward.

However, asset quality trend would be crucial as the management has hinted for accelerated provisioning if the asset quality pressure sustains. In Q3, total provisioning shot up by 78 per cent year-on-year due to some stress in select accounts in the commercial vehicle segment. The latter along with construction equipment accounted for around 18 per cent of M&MFS's overall AUM as of December 2019. Nonetheless, lower tax led to around 15 per cent year-on-year growth in net profit to Rs 365.3 crore despite a 6 per cent decline in profit before tax to Rs 488.2 crore. The stock is currently trading at 1.7 times it FY21 estimated book value.


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