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M&M Financial Services (MMFS) reported profits of Rs6.84bn (+13.9% YoY, a tad ahead of our estimates of Rs6.2bn) led by lower provisions, though PPOP (at Rs9.4bn) was below our expectations led by higher opex towards collections, technology projections and staff costs. AUM growth at 27% YoY (as disclosed earlier) was strong led by continued momentum in disbursements across product portfolio. Importantly, asset quality for MMFS continues to improve with GS3 at 4.5% (vs 5.9% QoQ) and NS3 at 1.9% (vs 2.5% QoQ). Management indicated strong focus reducing the volatility in asset quality/profitability while being committed towards delivering a on its Mission 2025 – doubling the AUM (over FY22 levels), RoA +2.5%. This is likely to be led by driving a higher share of premium customers (which also mirrors the parent’s newer product profile), increase in share of newer products low credit costs. MMFS stock price has been rewarded with the mgmt’s reinvigorated focus on key profitability and asset quality parameters (+42% over 1yr, +33% over 6m) and incremental returns will be driven predictability of earnings and continued delivery of its stated objectives. A rural slowdown, impact of subpar monsoons remain key monitorable. We like management’s categorical stance on focusing on risk parameters and expect gradual delivery to drive incremental returns. We tweak our earnings to adjust for higher opex and Maintain BUY with target price of INR310 (values MMFS core business at 1.6x FY25e for RoEs of 16.5% for FY25e).

* Robust AUM growth continued: In 4QFY23, disbursements saw a 50% growth YoY at at INR 138bn (+50% YoY/ -5% QoQ), driven by cars and pre-owned vehicles this quarter. MMFS saw a robust growth in AUM at INR 995bn (25% YoY, 5% QoQ) led by sharp uptick in new business segment (16% QoQ) viz. SME, Trade Advances, Personal and Consumer Loans, Finance Lease Receivables and stable growth in vehicle finance segments with Auto + UV/Cars/CV/Pre-owned vehicles(5% QoQ)and slowdown in tractor segment (-2.2% QoQ). Mgmt. highlighted that going forward they will scale up new business segments to increase share to ~15% by FY25 as against 10% in FY23 accompanied by growing pre-owned segment reach to be the leading financer this will help MMFS to diversify its book and increase cross sale opportunities. We estimate AUM CAGR 28% over FY23-25E aided by acceleration in vehicles sales and price increase, pickup in government spending and scaling up of new initiatives such as SME lending and vehicle leasing.

* Increased opex drives PPOP growth lower: In 4QFY23 MMFS witness a beat on PAT at INR 6.8bn (+10% JMFe) on the back of improved provisions with increased collection efficiency. PPOP was lower at INR 9.4bn (+5% YoY, -5% QoQ) on account of increased opex at INR 7.7bn (+23% YoY, +20%QoQ) directed towards tech initiatives and improved customer experience. NIMs (calc.) were at 7.09% (-87bps YoY/ -13bps QoQ) on account of change in product mix and jump in CoB (+149bps YoY/ +50bps QoQ). We forecast PPOP CAGR of 33% over FY23-25E with, cost-to-assets avg at 2.91%.

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