Q2FY24 Review: M&M Fin Services: Margin headwinds come to fore even as seasonality remains pronounced

30 Oct 2023 , 12:44 PM

MMFS’ bottom-line missed ests by ~50% as NIMs compressed 40bps QoQ and 20% increase in credit costs on elevated write offs. Its strategy of reducing quarterly volatility by focussing on better quality customers has not borne fruit, evidenced by credit costs of 2.6% in H1FY24 vs H2 implied guidance of 1.1%. Analysts of IIFL Capital Services believe that MMFS is caught between having to expand margins and lending to better quality customers (lower CC, yields) at the same time. Analysts of IIFL Capital Services expect MMFS’ sustainable profitability to be weak (2% ROAs, 14% ROEs by FY26) as margins remain subdued on rising COF and yield pressures even as they aggressively build 1.7% credit costs (vs 2.1% 10Y avg pre-COVID). Retain SELL. 

~50% miss on weak margins and higher credit costs: 

MMFS reported weak set of numbers with flat NII QoQ (4% below analysts of IIFL Capital Services ests) as NIMs compressed 40bps QoQ (20bps adj. for trade advances) and 20% QoQ increase in credit costs on elevated write offs (1.6%), driving 45% bottom-line miss vs their ests. AQ was weak with net slippages increasing 90bps QoQ to 2.8% (ann.). But, reported gross stage 3 was flattish QoQ at 4.3% aided by elevated write offs. 

Caught between a rock and a hard place: 

Despite under-delivering, management retained its 2.5% ROA guidance (on total assets). Analysts of IIFL Capital Services expect MMFS to miss this on continued margin pressures: Yield pressure from new businesses (~130bps lower yields) and COF to rise another ~10-15bps over remainder of FY24 and is unlikely to decline materially in FY25 even after factoring 25bps rate cut for full FY25. Furthermore, aggressive credit cost assumption of 1.7% could be at risk as: 1) Stage 1 & 2 PCR is at its lowest since FY17, 2) AUM mix of >70% LTV is at its highest, 3) 90% of its stage 3 retail loans have >100% LTV and 4) downside risk to company’s ECL assumptions. 

Retain SELL with TP of Rs240: 

Analysts of IIFL Capital Services retain their cautious stance on weaker sustainable profitability: 2% ROAs and 14% ROEs by FY26. Analysts of IIFL Capital Services cut their ests by 2-11% on Q2FY24 miss and reduce TP to Rs240 (from 260), implying 2YF P/B of 1.3x.