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    Stock Ideas: JM Financial has a buy on M&M Financial, target price Rs 220

    Synopsis

    Using SOTP, the brokerage values MMFS standalone at 0.85 times Mar’22E BV implying a value of Rs 189 per share. It values MRHF at Rs 22 per share and MIBL at Rs 9 per share, resulting in a target price of Rs 220.

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    JM Financial has given a buy rating to M&M Financial with a 12-month SOTP-based target price of Rs 220.

    In the fourth quarter of 4QFY20, M&M Financial (MMFS) reported a weak PAT of Rs 221 million down 62 per cent year on year/ 40 per cent quarter on quarter owing to higher provisions including Rs 5.74 billion (0.7 per cent of AUM) in Covid-19 related provisions.

    At a pre-provision operating profit level, operating profit growth was healthy at 25 per cent year on year / 9 per cent quarter on quarter on the back of lower opex – down 24 per cent year on year/ 19 per cent quarter on quarter. Other highlights are, i) weak disbursement, down 21 per cent year on year / 28 per cent quarter on quarter led by all categories except used vehicles, ii) a 12 per cent year on year / 2 per cent quarter on quarter growth in AUM led by used vehicles, and iii) GS3 ratio was up 154bps year on year/ down 16bps quarter on quarter with loss of activity in second half of Mar’20 having an impact of c.150 bps on the GS3 ratio.

    With 75 per cent of the book under moratorium, M&M Financial strengthened S3 coverage ratio to 31 per cent in fourth quarter FY20, up 8 per cent quarter on quarter, via Rs 4.74 billion of S3 Covid-19 provisions based on assumption changes relating to red zone activity levels, vehicle-use segmentation and lower repossessions as MMFS allows customers some leeway in bringing their accounts back to standard.

    Growth in the short-term will be challenging and driven by tractors (expectations of good harvest) and used vehicles (new asset acquisition is not a priority for customers in this environment). Over the medium-long term, MMFS remains best placed to play rural growth given a) strong parentage and long track-record, b) deep penetration and larger presence across OEMs, c) low overlap with banks - expertise in underwriting based on farm cash flows, and d) increase in rural spending by government. The brokerage has forecast asset under management CAGR of 5 per cent over FY20-22E with earnings CAGR of 30 per cent.

    Investment Rationale

    MMFS is comfortably placed to meet all obligations including fixed costs over the next 6 months (till Sep’20) taking into account the RBI moratorium being used by customers. This confidence has allowed MMFS to not approach any bank for a moratorium on its repayments. The company currently has over Rs 45 billion of liquid investments. In terms of solvency, T1 is comfortable at 15%.

    Using SOTP, the brokerage values MMFS standalone at 0.85 times Mar’22E BV implying a value of Rs 189 per share. It values MRHF at Rs 22 per share and MIBL at Rs 9 per share, resulting in a target price of Rs 220.

    Financials

    For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 3,101 crore, up 1.80 per cent from last quarter sales of Rs 3046.10 crore and up 7.67 per cent from last year's same quarter sales of Rs 2880.05 crore. The company reported net profit after tax of Rs 230.67 crore in the latest quarter.

    Promoter/FII Holdings

    Promoters held 51.18 per cent stake in the company as of March 31, 2020, while FIIs held 23.94 per cent, DIIs 15.56 and public and others 9.32 per cent.
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