Axis Securities has selected financial services firm MAS Financial Services (MAS) as its top pick for this week. This is on the back of expectations of buoyant business growth, strong return ratio, healthy asset quality and reasonable valuations.
MAS is a diversified financial services provider focused on low-income groups and economically weaker individuals operating small businesses, as well as, SMEs having limited access to formal financing channels.
The brokerage has a ‘buy’ call on the stock with a target price of ₹843, indicating an upside of a little over 9 percent from its current market price of ₹772, as on July 24.
The stock has surged 43 percent in the last 1 year but has lost a little over 3 percent in 2023 YTD. It has given positive returns in 4 and negative in 3 months out of the 7 months in the current calendar year so far. The stock has added around 1 percent in July so far, extending gains for the third straight month after over 5 percent gain in May and June each. However, it shed over 12 percent in April.
Investment Rationale:
Strengthening direct distribution network to support robust AUM growth: As per the brokerage, given the ease in scaling up the business through the direct distribution network, MAS will look to increase its branch network in core and new geographies to 175 in FY24 from 149 branches in FY23. The management expects the contribution of direct distribution to the overall network to improve to 70 percent over the medium term versus 62 percent currently, further stated Axis Securities.
The brokerage also informed that with ample growth opportunities, focus on the MSME segment, and improving branch productivity, MAS expects to clock a healthy AUM growth of 20-25 percent CAGR on a steady state basis adding that the firm eyes a near-term milestone of clocking an exit AUM of ₹10,000 crore in FY24. The management remains confident that the housing opportunity remains large and expects the housing finance book to grow at 30-35 percent in FY24 and reach an AUM of ₹1,000 crore over the next 2 years, it highlighted. Along with the ramp-up of direct distribution channels, MAS’ fintech/co-lending partnerships will also incrementally contribute to growth, said the brokerage.
Asset quality to remain stable: The brokerage also believes that MAS’s cautious lending approach, strong underwriting practices, and willingness to sacrifice growth in situations where asset quality may be compromised have helped it maintain its asset quality even during testing times of COVID-19 and despite the RBI circular on asset quality recognition. The new segments are currently behaving well and the company will continue to closely monitor the movement in the portfolio, it added. The management expects to maintain GNPA/NNPA at 225-275 bps/150-200 bps on a steady-state basis. With no major challenges on asset quality, credit costs are expected to be at 100 bps in FY24, noted the brokerage.
Consistent 3 percent RoA delivery potential: Given that a large part of MAS’ borrowings is linked with MCLR, the interest rate hikes reflect in the cost of funds (CoF), albeit with a lag, hence, the management believes that MAS will be able to contain its CoF at 9.5 percent by leveraging the company’s ability to anticipate funding requirements, having adequate sanctions on hand, and borrowing from diversified sources, the brokerage explained. Also, with certain repricing opportunities available on the lending yields, MAS expects to maintain NIMs between 6.75-7 percent over the medium term, added Axis. Thus, stable NIMs and benign credit costs should offset the pressure on cost ratios owing to a shift towards direct sourcing and so the brokerage expects MAS to continue delivering a healthy RoA/RoE of 3-3.1 percent/16-18 percent over FY24/25E.
