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Mahindra & MahindraServices (MMFS IN)FinancialRating: HOLD CMP: Rs187 TP: Rs200July 29, 2022Decent Set, Credit Costs Remain VolatileQ1FY23 Result UpdateQuick Pointers: Change in Estimates Target Reco Asset Quality slightly deteriorated with GS3 at 8.0% v/s 7.7% in Q3’22.Change in Estimates Provisions of Rs 6.4bn taken this quarter including write-offs of Rs5.7bnRatingTarget PriceNII (Rs.)% Chng.PPoP (Rs.)% Chng.EPS (Rs.)% Chng.CurrentFY23EFY24EPreviousFY23E 0058,781 65,724MMFS reported a decent set of numbers with PAT coming in at Rs2.2 bn belowour estimates of Rs 6.1bn due to sharp rise in provisions. Provisions atRs6.4bn rose sharply up from Rs.64bn in Q4’22 due to elevated write-offs35,99538,148from repossessions. Write-offs of Rs5.7bn was taken in this quarter but12.313.1management believes this should moderate over the course of FY23. Usedvehicles AUM with a strong 16% QoQ growth could be a major growth driver,as their demand is really picking up now. Tractors/Cars segments remain softKey Financials - StandaloneY/e MarNet Int.Inc. (Rs m)Growth (%)Op. Profit (Rs m)PAT (Rs m)EPS (Rs.)Gr. (%)DPS (Rs.)Yield (%)Margin (%)RoAE (%)RoAA (%)PE (x)P/BV (x)P/ABV (x)although company has maintained leadership position in tractor ,18413.16.71.20.68.39.41.814.21.31.6Mahindra UV financing segmentsOur FY23 and FY24 estimates are unchanged, as cost pressures are expectedto kick in and be compensated by strong AUM growth driven by recovery inauto volumes. One has to closely monitor the credit costs and write-offs inthe upcoming quarters. Hence we maintain our ‘HOLD’ rating on the stockand our price target remains unchanged at Rs200 as we value MMFS at 1.8xPABV Sep’24E. Loan growth sustainability is the key: AUMs witnessed a growth of 11%YoY and 4.4% QoQ at Rs630bn [vs. PLe of Rs628bn]. Disbursements for thequarter clocked heathy 145%YoY/3% QoQ growth and management standsconfident about disbursements going forward due to improving inventory levelsKey DataMMFS.BO MMFS IN52-W High / LowSensex / NiftyMarket CapShares Outstanding3M Avg. Daily ValueRs.213 / Rs.12857,570 / 17,158Rs.231bn/ 2,910m1,236mRs.828.27mand price increase of OEM. Demand for used vehicles remains strong. Asset quality showed slight deterioration, write-offs remain elevated:GNPA at 8.0% stood lower than our estimates [vs. PLe of 8.03%] as against7.7% in Q4’22 and 15.5% in Q1’22. Provisions at Rs 6.4bn rose sharply on aQoQ basis vs Rs.6bn recorded in Q4’22 [vs. PLe of Rs .7bn]. Credit chargeShareholding Pattern (%)Promoter’sForeignDomestic InstitutionPublic & OthersPromoter Pledge (Rs bn)52.3717.5517.9512.13-includes Rs.6bn Stage 1 provisions, write back of Rs2.6bn stage 2 provisions,Rs2.7bn stage3 provisions and write-off of Rs 5.7bn. Company has beenaggressive this quarter in terms of repossessions and believe it will slow downin the coming quarters. MMFS now maintains 100% provisions on those loancontracts which have an ageing above 18 months. Company continues toStock Performance (%)AbsoluteRelative1M4.7(3.6)make efforts for recovery on those exposures.6M15.414.612M25.614.8Akshay [email protected] 91-22-66322245July 29, 20221

Mahindra & Mahindra Financial ServicesAggressive write-offs lead to higher credit cost leading to PAT missPAT came in at Rs2.2bn below ourestimates [vs. PLe of Rs6.1bn] mainlydue to sharp rise in provisions.(Rs m)NII showed strong growth and roseby 34.2% YoY and 3.1% QoQ toRs15.5bn above our estimates [vs.PLe of Rs15.4bn] on better thanexpected AUM growthNet Interest IncomeInterest IncomeInterest 5,0673.2%-48.8%QoQOther Income12211110.5%239Total Income15,66611,69134.0%15,3062.4%Total Operating Expenses6,2084,20347.7%6,327-1.9%Operating Profit (PPP)9,4587,48826.3%8,9795.3%PPoP rose 26.3% YoY and 5.3%QoQto Rs9.4bn above our estimates [vs.PLe of Rs8.9bn] due to muted opex(up 47.7% YoY/ lower by 1.9% QoQ)and higher NII growth.Provisions & Write 9905,99,5585.2%6,04,4504.4%Provisions at Rs 6.4bn rose sharplyon a QoQ basis vs Rs.6bn recordedin Q4’22 [vs. PLe of Rs .7bn]. Creditcharge includes Rs.6bn Stage 1provisions, write back of Rs2.6bnstage 2 provisions, Rs2.7bn stage3provisions and write-off of 5.7bn.Company has been aggressive thisquarter in terms of repossessions andbelieve it will slow down in the comingquartersOff-Balance Sheet AUM8.4%6.44%1928.25%11AUM (Rs mn)6,30,9905,64,09011.9%6,04,4504.4%Auto/ Utility %1,08,80116.0%GNPA at 8.0% stood in line with ourestimates [vs. PLe of 8.03%] vs 7.7%in Q4FY22. NNPA also saw a slightincrease on a QoQ basis and came inat 3.5% vs 3.4% in Q4’22Asset QualityGross NPAs50,66887,434-42.0%46,3019.4%Net 7Net NPA (%)3.5%7.8%-4.3%3.4%0.2%AUM witnessed a good growth of4.4% QoQ and 11.9% YoY atRs630bn [vs. PLe of Rs628.0bn],Used Vehicles, CV/CE and auto/utilityvehicles saw a strong QoQ growth of16.0%,4.4% and 4.4% respectively,but tractors, cars segments saw degrowth.Coverage (%)58.1%53.7%4.4%58.1%0.0%Credit costs - On Loans1.34%19.99%-18.6%0.42%0.9%Total Borrowed Funds5,93,0905,56,2106.6%5,59,6206.0%Loans & Advances & sReported ProfitAssets Under ManagementNIMTractorsCarsCV/CEUsed vehicles & OthersGross NPA (%)0Balance sheet DetailsInsurance Brokers PAT2030-33.3%210-90.5%Rural Housing PAT20-650-103.1%-10-300.0%Source: Company, PLJuly 29, 20222

Mahindra & Mahindra Financial ServicesConference Call Highlights Business Update: Disbursements were healthy driven by expansion ofdemand in rural and the company estimates festival season to be buoyant.Improving inventory levels, expected price increase from OEMs and strongdemand would support disbursements Asset Quality: Even after adopting the RBI NPA circular in Oct’22, thecompany plans to maintain the current S3 PCR of 58% and therefore doesnot expect provisions to increase significantly in the remainder of this fiscalyear. MMFS now maintains 100% provisions on those loan contracts whichhave an ageing above 18 months. Growth Outlook: Does not see a reason to re-look at the disbursement target. Guidance: Expect credit costs to reduce by 1% by the end of FY23 driven bylower repossessions and write-offs. Estimate 50-60bp increase in weightedaverage CoF assuming further 50-75bp repo rate hike in FY23. Expectrecovery of 3-3.5b from the written off pool in FY23. New Segments: The company foresees strong demand in the leasing spaceand plans to even venture into retail leasing business going ahead. Sawsignificant traction on the auto front in the SME segment and expects SMEdisbursements of Rs20-30bn in FY23No change in estimates, target price maintained at Rs 200 with HOLD rating(Rs mn)Old EstimatesRevised Estimates% ENet Interest 0.0%Operating 0.0%Net 0%EPS (Rs)8.012.313.18.012.313.10.0%0.0%0.0%Price Target (Rs)Reco200200HOLDHOLD-Source: PLJuly 29, 20223

Mahindra & Mahindra Financial ServicesIncome Statement (Rs. m)Y/e MarQuarterly Financials (Rs. m)FY21FY22FY23EFY24EInt. Inc. / Opt. Inc.1,04,07296,5801,06,8331,17,818Interest Expenses47,33239,20247,45151,465Income from securitizationNet interest income56,62057,37858,78165,724Growth(%)Y/e 3----Interest Expenses10,1519,5149,3579,320Net Interest 1323912215,07315,91615,30615,666Int. Inc. / Operating 057,83657,98659,48066,564Net Operating Income10,15211,71413,47116,165Operating expenditureOther ,2681,3321,398Operating 37,25235,99538,148Exchange Gain / x4,16313,56920,26321,628Prov. for deferred tax liability8733,6825,1005,444Non-interest incomeGrowth(%)Net operating it Before TaxTaxEffective Tax rate(%)PATGrowth(%)Non-Interest IncomeGrowth .553.46.7Growth (%)Profit before taxEffective Tax RatePATGrowthAUMYoY growth (%)Balance Sheet (Rs. m)Y/e MarGrowth (%)FY21FY22FY23EFY24EBorrowingYoY growth 05,58,139-(7.2)(3.6)(4.7)-FY24ESource of fundsEquityKey Ratios2,4642,4662,4662,466Reserves and 3ENetworth1,47,1151,56,2811,65,4031,78,309CMP (Rs)18718718718729.56.25.87.8EPS Book value (Rs)119.4126.7134.1144.6(1.5)(4.7)9.99.7Adj. BV(Rs)100.196.9102.4114.0Deferred Tax Liability----P/E(x)51.523.315.214.2Other Current ,32410,01,761DPS (Rs)0.80.30.81.236.07.714.921.40.40.10.40.6Growth (%)Loan fundsGrowth (%)Other LiabilitiesTotal LiabilitiesApplication of fundsNet fixed assetsAdvancesGrowth (%)InvestmentsCurrent AssetsDividend Payout 338,09444,0041,29,3452,06,926Net current assets38,09444,0041,29,3452,06,926Other Assets13,23516,0146,3468,316Total AssetsGrowth 83,7981.260.63Business MixAUMY/e MarDividend Yield(%)Asset QualityY/e MarFY21FY22FY23EFY24EGross NPAs(Rs m)57,86096,83185,21882,109Net NPA(Rs m)23,79936,79639,20037,770Gross NPAs to Gross Adv.(%)9.07.76.76.2Net NPAs to net Adv.(%)4.03.53.43.158.962.054.054.0NPA coverage(%)Du-Pont as a % of AUMFY21FY22FY23EFY24ENII9.19.59.49.6NII INCI. Securitization9.19.59.49.799.42Total income9.39.69.69.84,7894,195Operating ability & Capital (%)Total Provisions6.03.92.52.4Y/e MarRoAA0.41.31.91.8Avg. Assets/Avg. net worth5.85.05.05.3RoAE2.66.59.49.4Growth (%)On Balance Sheet% of AUMOff Balance Sheet% of .8ROAE2.66.59.49.4Y/e MarSource: Company Data, PL ResearchSource: Company Data, PL ResearchJuly 29, 20224

Mahindra & Mahindra Financial ServicesPrice ChartRecommendation History(Rs)250207164121Jul - 22Jan - 22Jul - 21Jan - 21Jul - 20Jan - 20Jul - 1978No.DateRatingTP (Rs.)Share Price ug-21Sell148160-176Analyst Coverage UniverseSr. No.Company NameRatingTP (Rs)Share Price (Rs)1Bajaj FinanceBUY8,9536,3962Cholamandalam Investment and Finance CompanyBUY7436443L&T Finance HoldingsBUY88714Mahindra & Mahindra Financial ServicesHold2001895Manappuram FinanceBUY126916Muthoot FinanceBUY1,4311,0557SBI Cards and Payment ServicesAccumulate1,0018508Shriram Transport FinanceBUY1,5221,284PL’s Recommendation Nomenclature (Absolute Performance)BuyAccumulateHoldReduceSellNot Rated (NR)Under Review (UR)July 29, 2022::::::: 15%5% to 15% 5% to -5%-5% to -15% -15%No specific call on the stockRating likely to change shortly5

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1July 29, 2022 Rating: HOLD CMP: Rs187 TP: Rs200 Decent Set, Credit Costs Remain Volatile Quick Pointers: Asset Quality slightly deteriorated with GS3 at 8.0% v/s 7.7% in Q3'22. Change in Estimates Provisions of Rs 6.4bn taken this quarter including write-offs of Rs5.7bn MMFS reported a decent set of numbers with PAT coming in at Rs2.2 bn below