Buy This Finance Stock To Get Potential Surge of 28%, Tumbled 16% From Its Highs

Brokerage firm Sharekhan has given a buy call to the stock of Mahindra & Mahindra Financial Services for a potential upside of 28% if you purchase the stock at its current market price of Rs 171.30. M&M Financial Services reported strong disbursements growth in May 2022 with disbursements of Rs. 2,973 crore, an increase of 272% y-o-y, on a lower base, which was impacted by the second Covid wave.

1. Stock Outlook

The current market price of the stock is Rs 171.30 apiece. Its 52-week high and low levels have been registered at Rs 206 apiece and Rs 128 apiece. If you buy the stock at its current price it has the potential to surge to Rs 220 and offer you a potential gain of 28%. The stock has given a positive return of 5.25% in one year. The PE is 18.62 while sector PE is 30.72. EPS is recorded at 9.20. The dividend yield 2.10.

Current Market Price	Rs 171.30
Target Price	220
Potential gain	28%
52-Week High	206
52-week Low	128
One year return	+5.25%

2. Improving loan growth and cyclical recovery

With normalisation of economic activities, pick up in auto sales, and revival in the used commercial segment, we expect auto financiers to gain momentum in terms of loan book growth along with easing asset-quality pressures. We believe MMFS is set to benefit from the expected upcycle (FY2022E-FY2025E). Its vehicle AUM grew at a CAGR of ~6% over FY2018 to FY2022 and reached Rs. 650 billion. Under Vision 2025, management foresees AUM growth of 2x through leveraging its leadership in vehicle financing and scaling up new growth engines such as SME lending, LAP, leasing, and Digi Finco.

Hence, we believe MMFS is witnessing a turnaround with management's medium-term growth targets coupled with structural/cyclical tailwinds.

3. Asset quality to improve

The company has successfully managed in navigating through the franchise, the company has navigated the stress emanating from the COVID-19 pandemic reasonably well and is now poised to deliver on the articulated aspirational goals. Under the Vision 2025, MMFS aspires to contain gross stage 3 assets below 6% through credit cycles.

Further, with the collection efficiency at pre Covid levels in May 2022, it expects lower volatility in stage 3 assets in Q1FY2023.

4. Strong capital position

It is well capitalised with a CRAR of 27.8% (Tier-I capital of 24.3%). As of May 2022, it continues to hold adequate liquidity buffer of Rs. 8,775 crore,which covers approximately three months of liquidity.

5. Valuation

According to Sharekhan, "MMFS continued to report healthy disbursement volumes in May, representing strong demand. Disbursements also picked up significantly with better collection efficiency signaling recovery in vehicle finance, which is encouraging. Additionally, it plans to increase its non-vehicle share in mix SME, LAP, and digital finance. Further, management has unveiled its Vision 2025, which is expected to give it a fillip to deliver on earnings performance going ahead. Hence, given its strong liability franchise, leadership in rural financing along with strong parentage, the company is well on track to deliver on its aspirational goals.

6. About Mahindra & Mahindra Financial Services Ltd

Mahindra Finance began as a captive financier of Mahindra Utility Vehicles in the early 90s. From Mahindra UVs to tractors to non-Mahindra products, the company has diversified into a financial services provider with a whole suite of financial solutions tailored to the under-served customer in under-penetrated rural markets, according to its website. The current market capitalization is Rs 21,165 crore.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.