Why M&M Financial Services’ steady performance didn’t impress investors

  • The silver lining here is that even though disbursements were weak, customers have become more sticky
  • MMFSL shares have fallen about 22% in the past one year, primarily on account of the NBFC crisis

For all the troubles non-banking financial companies (NBFCs) have faced in the past one year, Mahindra and Mahindra Financial Services Ltd (MMFSL) has done well to report profit growth before provisions and tax of 28% year-on-year for the March quarter.

But investors seemed hardly impressed with the results of the firm, which is engaged primarily in financing the purchase of new and pre-owned vehicles, construction equipment and SME (small and medium-sized enterprises) financing. MMFSL’s shares have declined 4.5% after the company declared its March quarter results last week.

Despite decent profit growth, investors appear worried about the lack of growth in disbursements. Total disbursements for the March quarter declined by about 1% year-on-year. “Since the onset of the liquidity crisis in Sep’18, MMFSL has curtailed SME disbursements, which were experiencing over 30% growth rates up until 2QFY19," said analysts at JM Financial Institutional Securities Ltd.

The silver lining here is that even though disbursements were weak, customers have become more sticky, since competition has reduced after the liquidity crisis. As such, assets under management have grown 27% year-on-year. With less competition, the number of customers repaying loans early has reduced.

But evidently, this is not good enough for investors. MMFSL shares have fallen about 22% in the past one year, primarily on account of the NBFC crisis.

Some analysts are also worried about the lack of meaningful triggers for the stock. “If we view the performance of MMFSL in the light of rural economy’s third consecutive year of improvement, it seems that the best is already being manifested," said analysts from Antique Stock Broking Ltd in a report on 25 April. For perspective: Asset quality improved last quarter. The company’s gross non-performing assets dropped nearly 20% compared to the December quarter. Return on equity for FY19 stood at 15.2%.

Going ahead, the slowdown in the auto sector is likely to rub off negatively on MMFSL’s prospects. Further, investors should watch how the monsoon plays out. Needless to say, subpar rains are likely to weigh on rural sentiments adversely. That in turn may affect the firm’s fortunes. “We know from the past that MMFSL remains a deeply cyclical business with high leverage to rural economy," says the Antique Stock Broking report.

The silver lining in this story perhaps is that MMFSL shares have underperformed the Nifty 100 index meaningfully in the past one year, suggesting investors are factoring in these concerns already.

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