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Steady Quarter; Growth Momentum to Improve Gradually!

Est. Vs. Actual for Q1FY26: NII – INLINE; PPOP – INLINE; PAT – INLINE

Changes in Estimates post Q1FY26

FY26E/27E (%): NII: -1.7/-0.7; PPOP: -1.8/-0.5; PAT: -2.4/-0.9

Recommendation Rationale

• Prudent Growth While Prioritising Asset Quality: MAS has consciously pruned its growth amidst an uncertain and challenging credit environment, especially in the customer segment the company caters to. However, the log-in, disbursement, and sanction rates have remained broadly stable and not deteriorated. Thus, the management is confident of growth picking up in H2, enabling MAS to deliver a steady AUM growth of 20-25%. As the company aims to double its AUM over the next 3 years, focus will continue to remain on the core MSME product, with recovery expected across major industries. The salaried personal loans, a key growth driver (~85% CAGR growth over FY23-25, albeit on a low base), will be capped at 10%. The management remains optimistic about growth in the Wheels portfolio improving led by CVs and used cars. Similarly, the growth in the housing finance subsidiary continues to gather pace, and the management is confident of clocking AUM of Rs 1,000 Cr by FY26. We expect MAS to deliver a healthy 22% CAGR AUM growth over FY25-28E, with further scope to accelerate growth contingent on a strong pick-up in the MSME segment.

• NIMs to move with a positive bias: MAS’ margin profile is expected to benefit from the shift in the portfolio mix with an increase in the share of the wheels portfolio alongside a passthrough of the rate cut, reflecting on the CoF. The management highlighted that the direct distribution to earn higher yields vs NBFC partner sourcing further supports NIMs. While the reduction in borrowing cost is yet to reflect in the CoF, the company has seen a 5-10bps reduction in MCLR rate from banks and expects the same to reflect from Q2 onwards. Overall, the CoF is expected to decline by 25-35bps over FY26. The company will also look to further diversify its borrowing mix over the medium term, by improving the share of NCDs to 25% vs ~18-19% currently and inclusion of ECB loans forming ~10% of the borrowing mix, in its bid to exercise control over CoF. Thus, the management has guided NIMs to be maintained between 7-8% on a steady state basis.

• Asset Quality concerns to ease over H2FY26: The borrower segment MAS caters to continues to face challenges, and demand uptick is expected to be visible over the coming couple of quarters. Despite this, the company has been able to maintain asset quality within its tolerance limit, though a marginal deterioration was visible in Q1. The asset quality metrics across most portfolios (MEL, SME, and 2-Wheeler) continue to remain healthy, while there has been a slight uptick in stress in the CV portfolio. Resultantly, MAS has curtailed growth in the CV segment. The management expects asset quality concerns to gradually ease from Q4 onwards and remains confident of maintaining credit costs under control.

Sector Outlook: Positive

Company Outlook: As the macro environment turns favourable, supporting a demand uptick, MAS will look to accelerate growth as it continues to aim at doubling its AUM over the next 3 years. The ramp-up of the direct distribution channel will be a key growth enabler, facilitating strong growth at better yields, which would offset the impact of higher Opex. Asset quality has held up well despite unfavourable macros, especially in the customer segment the company caters to and is expected to improve over FY26. Thus, we expect MAS to deliver a healthy 22/23/22% CAGR AUM/NII/Earnings growth over FY25-28E. Thus, MAS is expected to deliver a RoA/RoE of 2.8- 2.9%/14-16% over the medium term.

Current Valuation: 2.2x FY27E BV Earlier Valuation: 1.8x FY27E BV

Current TP: Rs 400/share. Earlier TP: Rs 325/share

Recommendation: We maintain our BUY recommendation on the stock.

Financial Performance:

? Operational Performance: MAS’ disbursements growth improved and grew by 15/3% YoY/QoQ. The share of sourcing from NBFC partners inched up QoQ to 35.2% vs 35.8% QoQ. AUM growth stood at 20/3% YoY/QoQ. The MSME segment (~76% Mix vs 77% QoQ) grew by 15/3% YoY with Micro enterprise loans growth improving and growing at 11/4% YoY/QoQ and SME growth slightly slower at 20/1% YoY/QoQ. In the wheels portfolio (~15% Mix, flat QoQ), CVs grew by 18/-1% YoY/QoQ and 2-Wheelers grew by 30/11% YoY/QoQ. The salaried personal loans segment grew by 92/9% YoY/QoQ, albeit on a smaller base.

? Financial Performance: NII grew by 31% YoY and flat QoQ, aided by healthy AUM growth, though NIMs (calc.) contracted QoQ by ~24 bps. NIMs (calc. on AUM basis) stood at 7.4% vs 7.6% QoQ. Non-interest income growth was strong at 46/18% YoY/QoQ. Opex continued to reflect investment trends as the company shifts towards a direct distribution model and grew by 46/11% YoY. C-I Ratio stood at 34.8% vs 32.9% QoQ. PPOP grew by 31/2% YoY/QoQ. Credit costs came in marginally lower than expected and stood at 193bps vs 200bps QoQ. Earnings grew by 19/4% YoY/QoQ.

? Asset Quality deteriorated with GNPA/NNPA at 2.49/1.63% vs 2.44/.62% QoQ.

Key Takeaways

Direct Distribution Scale-up Driving Opex Growth: MAS has been looking to expand its branch network as it looks to scale up its direct distribution network. As on-ground challenges fade gradually, the company will resume its branch expansion exercise from H2FY26 onwards. The management expects the share of retail distribution to improve to 70- 75% over the next 6-12 quarters vs ~65% currently. The direct distribution provides MAS with greater agility to accelerate growth at better yields. However, it also results in higher Opex and marginally higher credit costs. Despite this, the management is confident of maintaining RoA of 2.8-3% on a steady state basis with expectations of higher yields offsetting the impact of Opex and credit costs.

Outlook

MAS remains well-positioned to deliver a strong AUM growth driven by a strong distribution network and adequate capitalisation. We factor in slower growth given a slight delay in recovery in demand within the customer segment, promoting a minor cut of 1-2% on our NII estimates. Scaling up of the direct distribution should keep Opex ratios higher. Receding asset quality concerns should result in credit costs gravitating to normalised levels of 1.5-1.6% over the medium term. We trim our earnings estimates by 1-3% factoring in higher Opex and marginally higher credit costs. We expect MAS to deliver a strong 22/23/22% CAGR growth in AUM/NII/Earnings over FY25-28E.

Valuation & Recommendation

We reiterate our BUY recommendation on the stock. The stock currently trades at 1.8x FY27E BV, and we value the stock at 2.2x FY27E BV to arrive at a target price of Rs 400/share, implying an upside of 20% from the CMP.

Key Risks to Our Estimates and TP

• The key risk to our estimates remains a slowdown in overall AUM growth momentum owing to economic shocks, which could potentially derail earnings momentum for the bank.

• Asset quality concerns in the salaried personal loan segment

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