Mahindra Finance: down but not out

The signs are there of rural India limping back to normalcy after being hit hard by the demonetization exercise which purged 86% of cash from the economy. Further confirmation comes in the financial results of Mahindra and Mahindra Financial Services Ltd (Mahindra Finance).

The fourth quarter (Q4) numbers brought a painful year to an unpleasant end. It reported a net profit of Rs234 crore, a 37% fall from the previous year. This undershoots the consensus Bloomberg estimate by a huge 29%. Provisions more than doubled to Rs361.4 crore. But this is where the bad news ends.

Mahindra Finance’s asset quality showed a smart turnaround in Q4, with both gross and net non-performing asset (NPA) ratios improving sharply from the previous quarter. Gross NPAs fell to 9% of the loan book from 11.1% in the previous quarter, while the net NPA ratio slipped to 3.6% from 5.2%. The fact that fresh slippages are being contained is another reason to cheer asset quality.

In its interaction with analysts, the company’s management explained that while fewer new loans are becoming delinquent, old borrowers labelled NPAs are still not able to service their debt.

Essentially, this means that villages have not yet fully recovered from the note ban and drought conditions in the southern states have added to the pain. Indeed, the Mahindra Finance management also said that NPAs are more geography based (largely from Karnataka and Tamil Nadu) rather than product based.

Be that as it may, it looks like the worst is behind the lender in terms of asset quality. Sequentially, the impressive jump in core income, margins as well as improvement in bad loan ratios suggest that 2017-18 would be a lot better for Mahindra Finance.

What is also heartening is that the company has increased provisions and improved its provision coverage ratio.

Given that the stock has recouped most of the losses that it suffered during the demonetization months of November and December, it seems the good news has been factored in. For valuations to look adequate from here on, Mahindra Finance will need to strengthen its asset quality in a big way. A forecast of a normal monsoon and the management’s confident outlook augur well

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