M&M Financial
Price: Rs359
BUY Target: Rs425 (March’11)
Flying high
* Stellar PAT growth of 110% YoY; 20% ahead of expectation: M&M Financial
Services (MMFS) reported strong earnings growth at Rs933mn in 3Q10 driven by
robust NII growth (up 22% YoY) and significant improvement in loan loss
provisioning (down 36% YoY)inspite of increase in coverage ratio.
* Strong disbursement growth of 74% YoY: Disbursements rose to Rs16.6bn
due to revival in auto industry as cars (up 110% YoY) and UVs (up 52% YoY) lead
the higher disbursement growth. However, loan growth was at 11% YoY to
Rs79bn due to sell-down of loan portfolio. Loans Securitised during 3Q10
increased by 61% YoY and now constitutes 16% of AUM. We expect 19% CAGR
growth in loan book during the FY09-12E period.
* NII grows 11% sequentially; NIM expands; expect higher securitization
income in 4Q10: NII was up 22% YOY due to expansion in NIM and higher AUM
growth. NIM improved by 134 bps YoY and 51 bps QoQ due to fall in cost of
borrowings and higher securitization income which increased 64% YoY. Because
of strong credit growth in FY09, there will be huge demand for PSL from banks
(PSL is calculated as % of opening advances) which is expected to drive
securitization income growth for MMFS.
* Asset quality improves; LLP down 36% YoY despite an increase in coverage
ratio: Asset quality improved because of increased focus on recoveries and
balance sheet growth. Gross NPLs declined by 121 bps YoY to 9.42% in 3Q10
while net NPLs were at 2.54%. LLP was down by 36% YoY inspite of sequential
improvement of 375 bps (10.3% YoY) in coverage ratio to 75%. We expect credit
cost to improve by c.80bps over the FY09-12E period driven by higher loan
growth, better cash collection on account of improved macro economic
environment and improved recovery mechanism.
* Superior performance to continue; maintain BUY with a target price of
Rs425: We expect 19% CAGR loan book growth, on the back of auto industry
revival, to translate into 14% CAGR in NII during the FY09-12E period. While we
are also building in 80bps pressure on margins, however with declining credit
costs, strong CAR (19.4% with tier I of 16.8% in 3Q10) and well-diversified
distribution network, we believe external environment is favourable to MMFS for
superior performance. Consequently, we expect PAT growth of 20% CAGR during
FY09-12E.
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