With the economy selecting up pace, ample liquidity and benign prices, international brokerage and investigation firm Morgan Stanley believes India’s auto market is getting into a multiyear upcycle. Buoyed by this, the brokerage firm has upgraded automobile financiers, Mahindra & Mahindra Financial Services (MMFS) and Shriram Transport Finance (SHTF). “We think vehicle financing NBFCs – SHTF and MMFS – present one of the most compelling risk-reward offers for the next 12-24 months,” a report by Morgan Stanley mentioned.
At the present juncture, SHTF’s share value is up 220% from its 2020 lows whilst MMFS is up 134% from its 2020 lows. Despite this, MMFS is at present trading at one-year forward P/B multiples close to prior cycle troughs and at a 37% discount to its 5-year typical P/B, the report mentioned. On the other hand, SHTF’s P/B multiples are nonetheless at a 10% discount to its 5-year typical and at a 20% discount to its 10-year typical.
What’s assisting Morgan Stanley’s conviction is the negligible restructuring carried out by MMFS and the positive asset good quality overall performance posted by SHTF. Both the NBFCs have higher coverage for their loans, creating the analysts more confident about the asset good quality. “Valuations have been beaten down and are at below-average levels vis-à-vis the large caps that are trading around or above averages. Hence, we see a case of both low earnings expectations and low valuation multiples,” the report added.
Shriram Transport Finance
Asset Under Management (AUM) is anticipated to develop as the economy grows and auto sales choose up the pace. AUM development of 10% in FY22and 15% in FY23 are estimated. “We think SHTF offers better risk-reward than stocks with high premium-to-book values where stock returns are predicated on a return to high-double-digit loan growth, the timing of which is difficult to predict,” they added. In the Base Case situation, the target value is pegged at Rs 2,000 per share whilst the Bull Case target value is Rs 2,650 per share. In case issues go south, the Bear Case expects the stock to plummet to Rs 900 apiece.
Mahindra and Mahindra Financial Services
“We have increased our sustainable ROE assumptions with economic activity gradually improving and expected to increase further, we believe the worst is behind the company, and both asset quality and growth should start showing improvement,” the report mentioned. In the Bull Case, Mahindra and Mahindra Financial Services is anticipated to surge to Rs 315 per share, whilst in the Bear Case the stock could go down to Rs 109. The Base Case target value is at Rs 227 per share.
(The stock suggestions in this story are by the respective investigation and brokerage firms. TheSpuzz Online does not bear any duty for their investment suggestions. Please seek advice from your investment advisor prior to investing.)