Mas Financial stock is attractive and at a similar level to its IPO valuation, which is at a steep discount to its listing level of 2017
Highlights
- Underperformed Nifty in past seventy days
- No
negative surprise in earnings, except for Covid provision
- Asset
quality good so far, loan growth nosedives
-
Effective moratorium book 13 percent of assets by value
- Near
term credit cost might remain elevated
-
Valuation attractive for the long-term investors
Mas Financial (CMP: Rs 661
Market Cap: Rs 3617 crore) is one of the casualties of the COVID-19 pandemic in
the markets. The stock has not had a full-blown recovery; it is down 3 percent
in the past seventy days compared to an 11 percent gain for the Nifty. With
predominant lending to MSME and SME, the lockdown raised concerns about its
asset quality. This resulted in erosion of valuation from 4X forward price to
book at the time of listing in 2017 to 2.7X forward book now similar to its IPO
valuation. The first quarterly update amid a near-complete lockdown showed its
strength and resilience. Are investors missing an opportunity because of the
stigma attached to the NBFC space?
The
business
Mas Financial has stood out
time and again in the past in the midst of earlier crises and has only emerged
stronger. The business primarily focuses on loans to small businesses and
individuals. At present there are four product categories – micro enterprise
loans (MEL), SME (small & medium enterprise), two-wheeler loans and commercial
vehicle (CV) loans. The company also has a housing finance subsidiary catering
to affordable housing
Quarter at a glance
Source: Company
The earnings report was prima
facie subdued as assets under management declined sequentially on negligible
disbursements and higher collection; excess liquidity in the balance sheet
suppressed interest margin and provisions shot up as the company set aside Rs
30 crore for COVID-19.
The company has gone extremely
slow on disbursement and did not lend at all in April and May. It disbursed a
paltry Rs 108 crore in June and Rs 88 crore in July.
Source: Company
Thanks to the moratorium, asset
quality has not shown any signs of hiccups with gross and net stage 3 assets at
1.9 percent and 1.4 percent respectively, little changed from the previous
quarter.
What is
moratorium book suggesting?
The company had offered
moratorium to all its borrowers and the collection efficiency picture has
turned reassuring.
Source: Company
The crux of the bad asset story
for Mas is that as on end July close to 13 percent of loans by value is not
being serviced which is close to Rs 407 crore and the company is carrying
COVID-19 provisions to the tune of Rs 51 crore or 12.5 percent of this
vulnerable book. That is just about sufficient to cover provisions required
should these loans be restructured. The total provisions on account of COVID
are close to 1.6 percent of on-book assets.
Another point of comfort is
that loans originated through NBFCs - close to 57 percent of the total assets
and a cause for worry in earlier months - had a very high collection efficiency
of 93 percent in July.
While the book is yet
completely out of the woods, the signs are encouraging and we feel the company
will definitely avoid a hard landing and can pass this difficult phase with a
temporary increase in provisions that is more than adequately captured in our
estimates.
Why
should investors look at Mas?
Calibrated
growth strategy
Over the last twenty five
years, the company has grown its book in a calibrated manner without taking on
unnecessary risk. Between FY09 to FY19, the loan book grew at a CAGR
(compounded annual growth rate) of 35 percent. However, given the macroeconomic
challenges, despite adequate liquidity in its balance sheet, growth slowed down
in FY20 and the company has been taking a very cautious stance in recent times
as the primary focus remains recovery and asset quality.
Well-
funded
The company is extremely well
funded and has not availed of moratorium from its lenders and has enough
wherewithal to service its obligations for the next one year.
Its Capital adequacy remains
strong at 34.93 percent with tier 1 capital of 32.2 percent. As on 31st July, the
company had liquidity buffer of around Rs 1300 crore, unutilised cash credit
facility of Rs 700 crore and sanctions on hand to the tune of Rs 1125 crore.
Source: Company
Largely
a semi-urban &rural play
While COVID-19 has impacted
every business and every other region, it has been felt more in urban centres.
With 65 percent of the company’s books coming from rural and semi urban areas,
the chances of recovering early from the crisis are high.
Housing
finance subsidiary – no overt stress
Mas has a housing finance
subsidiary which is into affordable housing. This company has a small asset
book of Rs 284 crore and has shown no signs of asset quality deterioration so
far with gross and net Stage-3 assets at 0.36 percent and 0.26 percent
respectively. In terms of moratorium, as on end July, close to 17 percent of
on-book assets by value was not being serviced and it carries 4.5 percent
provisions on the same. This lending is secured and therefore, less of a
concern.
Attractive
valuations
While we acknowledge that the
road ahead may not be totally smooth, the management bandwidth, excellent track
record of handling multiple crises adeptly, strong capital position and
adequate funding makes us believe that this temporary phase shall pass with Mas
emerging stronger.
Source: Company, Moneycontrol Research
Valuations are attractive.
They are at a level similar to its IPO valuation which is at a steep discount
to its listing valuation of 2017. We feel Mas might not impress growth hungry
investors, but those looking for a predictable long-term compounding story
should look at gradually adding this company in their core portfolio.
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