M&M Financial Services better placed than peers as stock gains 19% in Oct

Despite the turbulence in the non-banking financial sector on account of liquidity issues, investors continue to keep the faith in companies like Mahindra and Mahindra Financial Services (MMFS). The stock, in the last one month, gained over 19 per cent as compared to the 7 per cent rise in the Nifty Financial Services index. 

Investors are betting on an improvement in the return on assets of the company to 2.5-3.0 per cent, from below 2 per cent a couple of years ago, as well as smaller impact of the current liquidity pressure on the company.

Among the positives for the stock are strong parent support from Mahindra and Mahindra, and satisfactory asset-liability management. This will help the company manage the liquidity issue. 

According to the company, it has a 25 per cent positive gap between assets and liabilities maturing in the next one year. The positive gap is when the assets that are getting matured over a specified period are more than that of liabilities, thus making surplus money available. 

However, funding cost will rise. Though MMFS — a rural-focused vehicle financier — has pricing power, it could nevertheless see near-term profitability pressure. Analysts at JP Morgan believe MMFS will need to absorb 50 per cent of the additional funding costs. Yet, net interest margin is estimated to remain at a satisfactory level of above 7 per cent, in FY19 and FY20.

Nevertheless, an expected improvement in asset quality should support earnings amid lower provisioning. After a 40 basis point sequential contraction in gross non-performing assets (NPAs), or bad loans, to 9 per cent in the September quarter, further slippage is likely to be contained with better collections on account of improvement in rural cash flow. 

According to Antique Research, the management believes sentiment in rural India have turned positive due to strong cash flows in farm and infrastructure segments. Analysts expect gross NPAs to come down to 7.5-8 per cent by March 2019, which will reduce by 50-60 basis points in FY20. 

Further, earnings support will also stem from credit growth. Net advances are expected to rise by about 20 per cent annually over FY18-20. However, a below-normal monsoon in some pockets of the country and moderation in tractor and auto sales could cap MMFS’ earnings growth, some analysts have said.