BackMahindra Finance: Strong Q4, but questions on sustainability
Unseasonal rains and the prospects of a below-normal monsoon may hurt rural cash flows and lead to a deterioration in asset quality
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The distress in rural India has cast a shadow on the fortunes of Mahindra and Mahindra Financial Services Ltd although one couldn’t tell that from the company’s March-quarter numbers. The firm’s better-than-expected 9% growth in consolidated net profit was not as much a surprise as the improvement in asset quality.
Mahindra Finance’s gross asset quality ratio improved to 5.9% at the end of March, compared with 7.1% three months ago, as the company focused on recoveries. Its provision coverage ratio also increased to 61%, compared with 54.3% at the end of the third quarter.
What is perhaps more heartening is that the disbursements grew 7% from a year ago in the March quarter. This growth happened after four straight quarters of decline. The lower cost of funds and an interest reversal write back helped raise spreads. A tight leash on operating expenses and a 1 percentage point improvement in the cost-to-income ratio also contributed to the increase in profits. With the wholesale rates coming down and even banks reducing their base rates, Mahindra Finance’s margins are likely to improve in the coming quarters.
That’s the good news.
But the pressures on loan book growth and asset quality are not going to go away in a hurry. Unseasonal rains and the prospects of a below-normal monsoon are likely to hurt rural cash flows and lead to a deterioration in asset quality.
Secondly, the gross bad loan ratio could increase simply because the loan book can’t keep pace. At the end of March, Mahindra Finance’s assets under management grew just 8% from a year ago, a come down from the 11.1% growth seen at the end of the December quarter. Further, as IIFL Institutional Equities points out, a shift to 90-day past due payments, which the firm has to implement over the next two fiscals, could offset any cyclical easing of asset quality pressures. Thus, credit costs, even if they come down from the current high levels, would remain high for some time in comparison with historical averages.
With the growth momentum likely to be weak in the medium term, owing to sluggish rural demand and no sign of any on-the-ground revival in investment activity, it is no wonder that the Mahindra Finance stock has underperformed the BSE-100 index. A pickup in loan growth remains key to an earnings upgrade and a stock re-rating.
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