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Strong earnings and better profitability ahead in FY27 NIM dips ~15bp QoQ; asset quality stable and credit costs lower YoY

* Mahindra & Mahindra Financial (MMFS)’s 1QFY27 PAT rose ~70% YoY to ~INR9b ( ~20% beat). NII was INR24.1b (in line) and grew ~20% YoY. Other income rose ~29% YoY to ~INR3.5b (in line; PQ: INR3.5b; PY: INR2.7b), driven by higher dividend and fee income.

* Opex stood at ~INR10.1b (up ~8% YoY), and the cost-income ratio declined ~430bp YoY to ~36.5% (PY: 40.8% and PQ: 37.2%). PPoP stood at ~INR17.6b (in line) and grew ~30% YoY. Credit costs stood at ~INR5.7b (~20% lower than MOFSLe). Annualized credit costs stood at ~1.7% (PY: 2.2% and PQ: ~1.7%).

* MMFS targets ~16-18% AUM CAGR over FY26-FY31E, driven by industryleading growth in the wheels business (~11-13% CAGR) and ~30% CAGR in the non-wheels business. The growth strategy is centered on scaling newer businesses while preserving the strength and market leadership of the wheels franchise. Investments across leadership, distribution, product capabilities, and technology are beginning to gain traction, supporting expansion across mortgages, SME lending, and other non-wheel products.

* The housing finance business has moved past its legacy asset quality challenges and is delivering healthy profitability, while the insurance broking and asset management businesses continue to scale steadily. A higher contribution from fee-based businesses is also expected to diversify earnings and strengthen the franchise over the medium term.

* MMFS’ portfolio performance remains healthy, supported by disciplined underwriting, granular risk monitoring, and sustained CE. Strong early bucket collections, healthy recovery trends, and multi-year low 30+ DPD levels indicate that underlying asset quality remains resilient, despite seasonally weak trends in 1H of the fiscal year.

* Management overlays created in 2HFY26 provide a buffer against unforeseen risks, underpinning its ~1.3-1.7% credit cost guidance. We raise our FY27/FY28 estimates by 5%/~4% to factor in lower credit costs and opex. We estimate an AUM/ PAT CAGR of ~14%/ ~23% over FY26-FY28 and an RoA/RoE of 2.4%/15% in FY28. We reiterate our BUY rating with a TP of INR405 (based on 1.8x Mar’28E BV)

NIM dips ~15bp QoQ due to excess liquidity and a rise in CoB

* Yields (calc.) remained stable QoQ at ~14% while CoF (calc.) increased ~10bp QoQ to 7.1%, leading to spreads contracting by ~10bp QoQ to 6.9%. The NIM (calc.) declined ~15bp QoQ to ~7.1%.

* Near-term pressure on margins is expected to moderate through product mix optimization, calibrated pricing actions, and a higher contribution from fee-based income. The company also expects margin improvement as excess liquidity buffers normalize. We model NIM (calc.) of ~7% for MMFS in each of FY27E/FY28E.

Valuation and view

* MMFS’ strong quarterly performance was driven by lower credit costs and strong control of operating expenses. NIM moderation of ~15bp QoQ was driven by an increase in borrowing costs and excess liquidity. The improving business mix, coupled with ongoing investments in newer growth engines, provides a sustainable platform for medium-term expansion. Gradual normalization of excess liquidity will ease some pressure on NIM. Asset quality remains a key strength, with 30+ DPD now at a multi-year low and the management overlay providing comfort against any potential macro or monsoon-related headwinds.

* MMFS currently trades at 1.8x FY27E P/BV. With a projected AUM/PAT CAGR of ~14%/ ~23% over FY26-FY28 and an RoA/RoE of 2.4%/15% in FY28, we reiterate our BUY rating with a TP of INR405 (based on 1.8x Mar’28E BV).

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