Asset quality pains for M&M Financial Services to persist for the next few quarters: Report
Mahindra and Mahindra Financial Services Ltd (MMFS) would continue to feel the pains on asset quality for next few quarters as its non-performing assets (NPAs), especially from states like Maharashtra, Madhya Pradesh and parts of Uttar Pradesh (UP) has increased, says a research note.
In the report, Religare Capital Markets Ltd says, "During the fourth quarter, MMFS' gross NPAs (GNPAs) and net NPAs (NNPAs), on a 120 days past due (dpd) basis, increased to 10.7% and 5.4% from 8.0% and 3.2%, respectively. Management stated that on 90 dpd basis, NPAs would have been 15% with interest reversal of Rs300 crore."
"GNPAs and NNPAs of MMFS are unlikely to improve materially from current level in the next three to six months," the report says. "However, with reasonable improvement, management expects GNPA to improve by 1-2% (on 120 dpd) by FY17 end under base case scenario (asset growth of 15%). Management stated that the bucket movement is not happening which is a positive sign. The company is carrying Rs700 crore of excess provisions and may review (drawback from excess provision) as and when they transit to 90 dpd norms," the report added.
Up to March 2016, MMFS used to fully write-off all loans outstanding for more than 24 months. From the first quarter of FY2017 onwards, the company will provide only up to the unrealised value of loans (resale value of underlying vehicle will be considered). Therefore the company has reversed provision of Rs200 crore. The company has taken substantial discount to realisable value (as per the recent auctions) for arriving at provision write-back.
The company has about Rs1,000 crore worth of loans outstanding for 24 months. Collateral value of vehicles is around Rs400 crore and the company has applied about 50% haircut to collateral value.
According to Religare, the Mahindra & Mahindra group company is seeing a sign of pick up in tractor segment, which is a high margin business for them. Disbursements in the tractor segment grew by 9% on quarter-on-quarter (QoQ) while total disbursement grew by 2.5% QoQ.
Maharashtra and Madhya Pradesh, which account for about 25% of NPAs for MMFS, suffered from below average monsoon since last two years. These two states are large markets for utility vehicles (UVs) and tractor segments and the company management expects 10-15% NPAs can reverse over the next one to two quarters on the back of good monsoon, the report says.
Religare says, "We believe MMFS is the best play on a monsoon recovery. Above normal rainfall expected this year will boost rural incomes and thus result in better asset quality, lower credit costs, higher disbursements and stronger margins."