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.
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.
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