M&M Finance- 2HFY20 to be better

M&M Finance- 2HFY20 to be better

Update on the Indian Equity Market:

On Wednesday, NIFTY closed 1.7% higher. Among the sectoral indices NIFTY Bank (+3.7%), NIFTY PVT bank (+3.5%), NIFTY PSU bank (+3.1%) closed higher while NIFTY Media (-0.3%), NIFTY FMCG (-0.2%) NIFTY IT (-0.8%) ended on a negative note. The biggest gainers were IndusInd Bank (+5.5%), Infratel (+5.3%), Bharti Airtel (+5.2%) whereas Yes bank (-5.2%), Hero motocorp (-2.8%), Zee (-2.4%) ended on a negative note.

Excerpts from an interview with Mr. Ramesh Iyer – Chairman & Managing Director, M&M Financial Services.

  • Mr Ramesh said, “We have been focusing on the semi-urban rural market and we do see that the festival demand, at least the footfall at the dealerships are much much higher than what it was in the last six months.”
  • According to him, the festival season would turn out to be good and normally the second half for the rural market is always good, given the festival, and harvest has been in widespread range. Put together, he expects demand to pick up and the second half to be good.
  • They have revised FY20 loan growth numbers and there are four reasons for that:
    • Their deeper penetration is an advantage as they get volumes from the deeper pockets. 
    • Multi-product approach that they have been taking. Their growth is not dependent on a single product. 
    • They have been little more aggressive in pre-owned vehicle like pre-owned cars, tractors, UVs, etc, and they do see demand for a pre-owned vehicle in the rural market picking up.
    • Large customer base.
  • They have not seen too much competition and they expect some market share growth. So, that is one growth possibility.
  • Pre-owned vehicle segment has been a little aggressive and they do see growth coming from there. While the heavy commercial vehicle segment is not growing, they have a very small base or a low base and they do expect some volume growth there, given the total volume.
  • As far as the pre-owned vehicle is concerned, they were concentrating on cars and UVs. Now, they have also gone into pre-owned tractor financing and that is another very exciting segment.
  • These are the growth drivers and market share gain from their prime products like UV or car segment altogether is helping them maintain growth.
  • They do not see an issue to really worry about from the asset quality front but it all depends on yields. What is going to be the price that will get announced because the farm cash flow is important from a rural perspective, but they believe that given the widespread monsoon, at least in some of the states, the yields would be good.
  • They do not, therefore, see a spike in NPAs but there are some pockets where one could witness delay.
  • Their focus area is going to be semi urban, rural market and that is what they have done for the last 25 years. They do see a pick up in sentiment and they expect that in the next six months, with the festival and the harvest coming up, they should see some buoyancy in that market.
  • They are borrowing from banks, own debentures, fixed deposits and that has helped them maintain growth. But yes, there has been some increase in cost that they have witnessed initially but now that is climbing down.
  • Liquidity has not been an issue and as cost seems to get addressed, they feel a little more comfortable than that of six months back.
  • They will be open to any inorganic growth opportunity, but they do not have anything on the tables at this stage. But clearly, it has to have a strategic fit, a cultural fit and that is what they will look for.

Consensus Estimate (Source: market screener website & Investinng.com website)

  • The closing price of M&M Finance was ₹ 334 /- as of 09-10-19. It traded at 1.7x /1.5x/1.4x x the consensus book value for FY20E/ FY21E/FY22E of ₹ 194 /₹ 218/ ₹242 respectively.
  • Consensus target price of ₹ 378/- implies a P/B multiple of 1.6 x on the FY22 book value of ₹242 /-

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