Buy M&M Financial, target price Rs 225: JM Financial

JM Financial has given a buy rating to M&M Financial Services (MMFS) with a SOTP-based target price of Rs 225.

The NBFC is facing the twin challenges of growth and collections as well as asset quality in a seasonally weak first half which has been compounded by the Covid-19 outbreak and the consequent lockdown. The brokerage believes that the NBFC will have to support its earn-and-pay customers during this period and will prioritise collections over growth during FY21E.

The company expects 80-85 per cent of its customers to opt for the 3-month RBI moratorium given exacerbated cash flow mismatches. According to the company, the moratorium will most likely need to be extended by another 3 months).

The company’s share price moved up by 2.23 per cent from its previous close of Rs 159.20. The last traded price is Rs 162.40. Incorporated in 1991, the NBFC has a market cap of Rs 9837.91 crore.

Investment Rationale

Given that rural is relatively less impacted by Covid-19, recovery would be faster for rural agri/ farm related activities. Growth in the short term will be driven by tractors on expectations of good harvest and used vehicles (new asset acquisition is not a priority for customers in this environment).

Over the medium-long term however, the NBFC remains best placed to play rural growth given its strong parentage and long track-record, deep penetration and larger presence across OEMs, low overlap with banks and pricing power, and increase in rural spending by government.

The brokerage cuts AUM by 9-15 per cent over FY21-22E and earnings by 25-36 per cent on account of slower growth and higher credit costs. It has increased provisions by 50 per cent YoY in FY21E implying credit costs of c.290 bps in FY21E and 270 bps in FY22E. The stock is trading at an all-time low multiple of 0.6 times FY21E BV.

The brokerage has maintained its buy rating with a target price of Rs 225 valuing MMFS standalone at 0.85 time March’22 book value implying value of Rs 188 per share, Mahindra Rural Housing Finance at Rs 26 per share and Mahindra Insurance Brokers Ltd at Rs 11 per share.

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 3046.10 crore, up 4.53 per cent from last quarter sales of Rs 2913.97 crore and up 13.17 per cent from last year's same quarter sales of Rs 2691.62 crore. The company has reported net profit after tax of Rs 461.95 crore in the latest quarter.