MMFS: Robust earnings, right issue key driver

Mahindra & Mahindra Financial Services (MMFS) stock will see some flurry of activities in the near term on two accounts
First, the Mahindra & Mahindra Group’s non banking financial company (NBFC), has posted robust numbers for the quarter ended June 2020 and second the board of the company approved fundraising for an amount not exceeding Rs 3,500 crore, via rights issue.

The 1:1 right issue at Rs 50 apiece, is offered at a discount of 76% to the market price. The dilution would result in a drop in our RoE estimate to 6.5%/9% for FY22E/23 vs. 8%/11% previously.
The issue at a steep discount to the current price makes the stock extremely expensive (post dilution) to 2.4x P/Adjusted FY22E book against 1.3x P/Adjusted FY22E book earlier. The issue opens on 28 July 2020 and closes on 11 August 2020.

Meanwhile, MMFS reported its consolidated profit after tax (PAT) of Rs 432 crore during the quarter ended June 30, 2020, as against Rs 108 crore during the corresponding quarter last year, registering a growth of 300% over the same period the previous year.
Although, the NBFS witnessed a sharp surge in credit costs but a relatively strong demand from the tractor segment and gains arising from stake sale in the AMC business helped boost the bottomline.

Total consolidated income increased by 8% at Rs 3,069 crore during the quarter ended June 30, 2020, as against Rs 2,838 crore during the corresponding quarter last year.
Disbursements during the quarter declined 67% yoy due to the lockdown across the country, yet tractor disbursements (-34% yoy) supported overall sales.

The standalone assets under management (AUM) stood at Rs 81,436 crore as on June 30, 2020, as against Rs 71,406 crore as on corresponding reporting date last year, registering a growth of 14% yoy and 6% qoq.
This was mainly supported by lower repayments/prepayments amid 70% of the customers adopting moratorium.
Gross Stage 3 level NPAs eased sequentially to 9.2% from 8.4% last quarter, whereas Net Stage 3 level improved to 5.7% for the quarter vs. 6.0% as of March 2020.

Stage 3 provisioning coverage ratio improved sequentially to 40% (including Stage 1, 2 provisions) vs. 31% last quarter.
Promoters held 51.18% stake in the company as of March 31, 2020, while FIIs held 23.94%, DIIs 15.56% and public and others 9.32%.

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