MAS Financial Initiating Coverage Report By Motilal Oswal

Grassroots financier

An efficient player in high growth product segment

MAS Financial Services (MASFIN) is an Ahmedabad-headquartered, non-deposit-taking NBFC incorporated in 1995 by first-generation entrepreneurs, Mr. Kamlesh Gandhi and Mr. Mukesh Gandhi. It operates out of six states, of which Gujarat and Maharashtra account for bulk of the AUM. A quintessential NBFC, it targets the middle and low income customer segments. Over the past five years, MASFIN’s AUM grew at a robust 35% CAGR to reach INR37b in 1HFY18. Growth was driven by their flagship product (MEL loans) and new product such as SME loans. MEL and SME accounts for 83%+ of the total AUM vs 64% in FY13. The company has impeccable track record of 39% PAT CAGR over FY12-17 with consistent ROA (on AUM) of 2%+. Given a favorable backdrop, we expect the company to deliver 25% AUM over FY17-20, resulting in 25% EPS CAGR over the same time period.

Present in high growth segments, with differentiated offering

MASFIN is present in high-growth segments like Micro-lending (57% of AUM), MSME Lending (25%), Vehicle Finance (13%) and Housing Finance (5%). It has a unique business model, with over 55% of AUM coming from on-lending to other NBFCs and sourcing agents across focused product categories. AUM generated by NBFCs is hypothecated to MASFIN. 35-40% of AUM is assigned to banks (for PSL). The existing network offers immense growth opportunities and we expect the company to focus on local area expertise rather than expanding aggressively. MASFIN should deliver 25% AUM CAGR over FY17-20.

Strong risk management leading to superior asset quality

The company has consistently delivered GNPA ratio of 0.8-1.2%, despite change in norms on NPA migration and macroeconomic factors outside management control. Being a grassroots financier with strong local area knowledge, a unique business model of on-lending to other financiers and hypothecation of portfolio, and strong credit control, MASFIN maintains strong control over asset quality. Credit cost (including standard asset provision) for the company stands at ~1% – this is among the lowest in our NBFC coverage.

RoA to improve; PAT CAGR of 35%+

Margin improvement, operating efficiency and controlled credit cost should drive ROA improvement of 60bp+ and the company is expected to report 18%+ ROE on a consistent basis. The recent capital raise would be sufficient for next three years of growth, in our view. We believe MASFIN has all the ingredients of a good investment: (a) a small base and presence in well-developed states for strong growth, (b) superior asset quality, (c) relentless management focus on generating sustainable, high return ratios, (d) healthy capitalization, and (e) consistent dividend payout. We initiate coverage with a Buy rating and a target price of INR740 (25x FY20 EPS, Implied 4.3x FY20 BV).