With the economy picking up pace, ample liquidity and benign rates, global brokerage and research firm Morgan Stanley believes India’s auto industry is entering a multiyear upcycle. Buoyed by this, the brokerage firm has upgraded vehicle 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 said.
At the present juncture, SHTF’s share price is up 220% from its 2020 lows while MMFS is up 134% from its 2020 lows. Despite this, MMFS is currently trading at one-year forward P/B multiples close to previous cycle troughs and at a 37% discount to its five-year average P/B, the report said. On the other hand, SHTF’s P/B multiples are still at a 10% discount to its five-year average and at a 20% discount to its 10-year average.
What’s helping Morgan Stanley’s conviction is the negligible restructuring done by MMFS and the positive asset quality performance posted by SHTF. Both the NBFCs have high coverage for their loans, making the analysts more confident about the asset 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 expected to grow as the economy grows and auto sales pick up the pace. AUM growth 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 scenario, the target price is pegged at Rs 2,000 per share while the Bull Case target price is Rs 2,650 per share. In case things 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 said. In the Bull Case, Mahindra and Mahindra Financial Services is expected to surge to Rs 315 per share, while in the Bear Case the stock could go down to Rs 109. The Base Case target price is at Rs 227 per share.
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