M&M Financial Services' return on equity may improve by 300 bps: Analysts

Good demand from rural markets to keep loan book growth buoyant and credit cost lower

Apart from the liquidity issue hurting most non-banking financial companies (NBFCs), tapering automobile demand has been a major concern for Mahindra and Mahindra Financial Services (MMFS), the non-banking lender that mainly finances new vehicles. As a result, MMFS’ stock has shed 24 per cent in the last six months, including the 10 per cent fall after lower-than-expected December 2018 quarter (Q3) results were revealed last month. Yet, many analysts are positive given the company’s initiatives and a supportive rural economy.

Original equipment manufacturers (OEMs), which are tied up with MMFS, have shown good growth in rural sales despite an overall lull in auto demand, and the trend would continue. Part of this was also reflected in MMFS’ 24 per cent year-on-year growth in loan disbursements in Q3. This was on the back of deeper penetration and relationship with OEMs.

Some factors such as high fuel prices, increased cost of vehicle insurance and axel load norms are resulting in customers delaying their purchases. However, this would be mitigated with improving rural cash flow and spending. The government’s strong push to rural consumption ahead of the upcoming general election has only improved rural sentiment, say analysts; 85-90 per cent of MMFS’ assets under management or AUM (indicates the size of loan book) comes from the hinterland.

This would also be supported by MMFS’ improving product mix with the focus on pre-owned vehicles and branch expansion (adding over 100 branches in the next 12 months from 1,313 as at end of Q3). MMFS targets to increase the share of pre-owned vehicles to 15 per cent over the next 2-3 years from 9 per cent and with branch expansion, analysts at Motilal Oswal Securities (MOSL) expect MMFS to clock around 22 per cent annual growth in loan book over FY19-FY21. 

Though branch expansion would keep operating costs elevated, which was a reason for MMFS’ Q3 net profit falling short of expectations, any improvement in asset quality and better pricing power would help mitigate the impact going head. Even in Q3, MMFS’ gross non-performing assets fell to 7.7 per cent, a seven-quarter lower, from 9 per cent as of September 2018. All these should aid earnings.

Both, JM Financial and MOSL analysts expect MMFS’ net profit to grow about 25 per cent annually during FY19-21. The company’s return on equity is also expected to improve by 300 basis points over FY19-FY21, estimate analysts.