Emkay Global Financial has given Hold recommendation for Mahindra Finance with a target price of Rs. 205 in its research report issued on May 04, 2022

Emkay Global Financial’s report on Mahindra Finance

Mahindra Finance (MMFS) reported a PAT of Rs6bn (+301%yoy/-33%%qoq) in Q4FY22, in line with our estimates. Net interest income was affected by the reversal of a ~Rs1.43bn excess yield charged to customers. Operating expenses remained elevated on account of continued investment in the business. Considering the relaxation in the implementation of the RBI’s IRACP guidelines till Sep’22, the firm reversed 106% of the provision made in Q1FY22. Its aggressive repossession strategy resulted in the repossession of ~55,000 vehicles in FY22, leading to a write-off of ~3.9% of FY21 AUM in FY22. GS3/NS3 ratios improved to 7.7%/3.4% from 11.3%/5.6% in Q3FY22. MMFS seeks to leverage the ‘Mahindra’ ecosystem by providing financing, investment and insurance solutions in rural and semi-urban markets. It is primarily engaged in financing new and pre-owned auto/utility vehicles, tractors, cars, and commercial vehicles. MMFS is a play on the burgeoning credit demand of underserved rural/semi-urban India.

Outlook

We retain our Hold rating on the stock with a revised Mar’23 TP of Rs205 (up from Rs190), valuing the firm at 1.3x Mar’24E BVPS, using the excess return on equity method (ERE) for FY23E-24E RoE of 14.5%. While we increase our cost of equity to 13.75% from 13.25%, we also factor in a moderately higher AUM CAGR of 15% over our FY22-24E and beyond vs. 12% earlier. Consequently, our implied P/BV multiple moves from 1.2x to 1.3x on FY24E BVPS. Considering the improved growth outlook, we raise our forward estimates. Elevated stress on the balance sheet presents downside risks to our valuation. Upside risks include a faster-than-expected pick-up in growth and market share gains in the target market.

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