M&M Financial Services to ride tailwind

Improving rural sentiment augurs well for growth and asset quality

Mahindra and Mahindra Financial Services (M&M Financial) reported a good December quarter (Q3) because of growth in its core business, led by an improvement in asset quality.

Besides a 44 per cent yearon-year (y-o-y) surge in net interest income, its non-performing assets (NPAs) declined in Q3. Helped by a 53 per cent y-o-y decline in provisioning for loans, the company reported a net profit of ~3.42 billion (standalone operations) in Q3, against a loss of ~156 million in the year-ago quarter. After excluding the income from a stake sale in a subsidiary worth ~650 million, the company’s profit was ahead of estimates.

However, the stock was down 13 per cent after the results were announced last month. One of the reasons is that the stock had almost doubled last year and the market sentiment was subdued. On the other hand, the business environment remains steady.

During the last couple of years, the company witnessed subdued performance due to feeble rural sentiment amid poor rainfall and subdued crop prices. However, rural sentiment has improved, which was reflected in the company’s Q3 results.

“A good monsoon and harvest have helped the company report better recoveries and this trend is going to continue for a couple of quarters, thereby driving its earnings growth,” an analyst at a domestic brokerage said.

Analysts at Motilal Oswal Securities said the revival in the rural economy would enable M&M Financial to increase recoveries further along with its earnings and asset quality. “Over the last three quarters, there have been signs of a turnaround in the economic cycle. In this business, growth and asset quality improvement move in tandem. With the rural economy improving, growth is expected to pick up and at the same time, credit costs shall decline sharply,” they said.

The improvement in rural infrastructure augurs well since the firm deals in the financing of tractors, utility vehicles and commercial vehicles. “In the last few years, infrastructure activities were not at the expected level. However, given a pick-up in these activities, coupled with a good monsoon and harvest, FY19 is expected to be good for the company,” said Pritesh Bumb, Prabhudas Lilladher analyst.

The rural focus in the Budget should lead to increased farm incomes and, in turn, earnings for companies such as M&M Financial. The positive momentum shown by the automobile industry will also help M&M Financial to clock faster growth in loans. Over time, the firm has been diversifying its portfolio and includes SME financing and housing finance. The key near-term risk is the rise in domestic interest rates, which could affect most financing companies.

Given the prospects, many analysts have a ‘buy’ rating for the stock, indicating a potential upside of 20 per cent. tells

The bond market has seen a lot of action as the government’s fiscal math did not play out as expected. Will this volatility continue?

There is an upward shift in the Centre’s fiscal deficit from the earlier glide path for FY18 at 3.2 per cent and FY19 at 3 per cent. Bonds do not like fiscal indiscipline and it is reflected in the rise in yields. The recent worries have been compounded by elevated commodity prices; especially that of crude oil. There is a risk on account of the effect of the proposed increase in minimum support prices (MSP) and fiscal slippage in an election-heavy period and its effect on inflation. The bond market likes predictability. Given the uncertainties, volatility is likely to persist.

What is the trajectory of interest rates? Some analysts expect the Reserve Bank to tighten rates between October and December, or even before...