Disbursement growth was also strong during the quarter, driven by high disbursement in the CV, pre-owned vehicle and tractor segments. We consider the stock attractive at 3.1x FY20E P/Adj B and maintain our ‘buy’ rating.

The shift to IndAS boosted MMFS’ net worth by Rs 3.2 bn (3.4% of March 2018 net worth) as recognition of income accrued on stage-3 assets and the net impact of amortization of costs/fees was higher than the impact of increased provisioning on account of expected credit loss adoption.

AUM growth was led by CV, tractors and pre-owned segments, as the company continues to gain market share in its lead products. This, coupled with expansion in reported spreads (+130bps y-o-y to 7.6%), led total income growth of 45% y-o-y. Operating expense growth was slower at +17.5% y-o-y, resulting in a lower cost-to-income ratio.

Gross stage-3 loans declined y-o-y from 14.5% in Q1FY18 to 9.4%. Net stage-3 loans also declined to 6.3% (from 9.3% in Q1FY18).

The stage-3 provisioning coverage ratio stood at 35.1%. Stage-1 and 2 provisions are 258bps as a result of ECL provisioning under Ind AS versus standard asset provisions of 40bps, as per RBI norms.

During Q1FY19, MMFS migrated to Ind AS-based accounting, which enhanced FY18 net worth by ~3.4%.

We value MMFS using a sum-of-parts methodology. The core business is valued using the two-stage Gordon Growth Model. Key assumptions are cost of equity of 13.3%, normalized RoE of 18.5%, growth during stage-1 of 22%, and steady-state growth of 4%. This gives us a target multiple of 3.8x, which we multiply by Sept ‘19E Adjusted BVPS (adjusted for Net NPA and investment in subsidiaries).

Subsidiaries contribute Rs 50 to our TP, of which we value rural housing based on P/B and Insurance Broking based on P/E. This gives us a Sept ‘19E SOTP-based target price of Rs 600.