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M&M Financial: Monsoon failure remains a risk, but possibility has already been priced in

Despite stress in commercial vehicle segment, M&M's loan book rose by 22% due to healthy growth in the tractor and used commercial vehicles segment.

, ET Bureau|
Updated: May 12, 2014, 12.00 PM IST
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Despite stress in commercial vehicle segment, M&M's loan book rose 
by 22% due to healthy growth in the tractor and used commercial vehicles
 segment.
Despite stress in commercial vehicle segment, M&M's loan book rose by 22% due to healthy growth in the tractor and used commercial vehicles segment.
Mahindra & Mahindra Financial Services (MMFS) has surprised the street with better-than-expected results in the fourth quarter (Q4) of 2013-14.

Though the stress in commercial vehicle segment continued, the total loan book rose by 22% on a year-on-year basis due to healthy growth in the tractor segment (up by 23% YoY) and used commercial vehicles segment (up by 33% YoY).

However, disbursement declined by 11% YoY because the company tightened its lending norms in an otherwise slow market to protect its asset quality. The net profit for the quarter fell 7% YoY due to higher provisioning and taxes. MMFS is likely to report subdued top line and bottom line growth in the coming year due to its moderating loan book growth and high provisioning costs.

Though the company’s Q4 provisioning went up on a YoY basis, there is marked improvement in its asset quality quarter-on-quarter. While provisioning jumped by 128% on YoY basis, it fell by 58% q-o-q. And, due to this, the company’s gross non-performing assets (NPAs) and its net NPAs also fell by 7% and 14%, respectively, on a q-o-q basis, despite the drag from the commercial vehicle segment.

This lower slippage helped the company improve its margins as well. MMFS’s revised strategy of pacing down repossession and focusing more on collection efforts is the main reason behind the improvement in the company’s asset quality. Though its NPAs are still ruling at an elevated range of 4-5% compared to 3-4% earlier, the new NPA management strategy by MMFS is expected to bring it down in the coming years. The primary factor that has attracted analysts to the counter, however, is its reasonable valuation. As it is reflected in the relative performance chart, on the right hand side, MMFS has corrected significantly in the past six months. While the slowdown in the company’s commercial vehicle sales was the trigger for its earlier correction, the possibility of a monsoon failure is dragging the counter down now.

Despite the fall in its gross NPAs on a q-o-q basis, the management’s commentary was guarded on this front. This may have been prompted by the concern surrounding the possible disruption in monsoon due to the El Nino impact. MMFS’ niche rural presence is a very big positive for the company for the long term and investors should treat any concern emanating from it as a buying opportunity.
ET Wealth: M&M Financial: Monsoon failure still remains a risk, but the possibility has already been priced in
Selection methodology: We pick the stock that has shown maximum increase in “consensus analyst rating” during the last one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (i.e. 5 strong buy, 4 buy, 3 hold, 2 sell and 1 strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock.

To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 100 table.
ET Wealth: M&M Fin: Monsoon failure still remains a risk but possibility has already been priced in
ET Wealth: M&M Fin: Monsoon failure still remains a risk but possibility has already been priced in

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