Shares of Mahindra and Mahindra Financial Services Ltd have surged 29% over the past month, outperforming comparable peers and the broad market as well. This rally comes as a pleasant break from the downward trajectory seen immediately in the wake of the second wave.
Has the investor sentiment changed towards the non-banking financial company that relies heavily on the rural economy?
There are factors that have convinced investors that the firm’s balance sheet is on the mend, and delinquencies will be checked in the coming quarters. To start with, collections have improved steadily in July and August, in tandem with the lifting of restrictions that were triggered by the second wave.
Mahindra Finance reported collection efficiency of 97% in August, higher than 95% in July. Collection efficiency had averaged around 75% during the June quarter. The lender, meanwhile, has been taking measures to conduct business in a post-covid world. While the pandemic has not dramatically changed the business landscape, Mahindra Finance has relied more on real-time data and redesigned products for customers wherever necessary, Ramesh Iyer, managing director of the firm, said in an interview.
“Our use of data has become more profound. We are looking increasingly at partnerships now. We also redesigned some of the financial products,” he said. A change in approach towards collections, too, has helped the firm improve its delinquency rate.
But this is only one part of the story. The lack of business growth was also behind Mahindra Finance’s asset-quality metrics worsening in the past quarters. Its assets under management (AUM) shrank 3% year-on-year in the June quarter, a steady decline over five quarters after the pandemic struck in 2020. This is a far cry from the high double-digit growth clocked in earlier years. Disbursements, too, were hit but are now looking up. Analysts believe that the revival of the rural economy is critical for Mahindra Finance’s business growth improvement.
Iyer believes that rural incomes are poised to grow over the next 2-3 years. “I am confident that post-October, we would see growth returning, of similar nature that we saw in 2010-14,” he said. For FY22, though, he expects AUM to be flat. “The decline we are seeing so far would be arrested,” he added.
The firm is betting big on infrastructure projects resuming, which would boost demand for commercial vehicles and tractors. This pick-up in infrastructure activity, coinciding with the revival in the rural economy, would significantly improve disbursement growth. The prospects for a pick-up in rural demand have brightened with a normal monsoon and the encouraging pace of sowing. With the likely growth in rural incomes, delinquencies are also expected to come down as borrowers’ repayment capacity improves.
In a 2 September note, analysts at Citigroup Global Markets India Pvt. Ltd had pointed out that the firm’s valuations are modest, and an improving growth outlook would warrant a re-rating. With the 29% rise, shares are trading at around 1.5 times the estimated book value for FY22.
To be sure, tractor sales in August have not lived up to expectations and dampened the enthusiasm about growth. Tractor and commercial vehicle financing are the biggest lending segments for the firm. Perhaps investors are looking out for more conviction as shares, despite recent gains, are yet to reach pre-pandemic levels.
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