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M&M Financial Services (MMFS) reported a miss in PAT at INR 3.5bn (+58% YoY, -48% QoQ) due to elevated credit costs (2.1% of total AUM) which came in as a negative surprise for the quarter. NII stood at INR 15.8bn (+5.3% YoY, -1% QoQ) on account of NIMs decline of - 60bps QoQ. Mgmt. guided for margins to remain range-bound /expand from here on as the share of high yield pre-owned traction is increasing gradually. Opex was lower due to lower fee expense which led to healthy PPoP of INR 10bn (+5.7% YoY, +5.9% QoQ, +1.3% JMFe). AUM growth at +25% 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 4.3% (-14bps QoQ) and NS3 at 1.8% (-9bps QoQ). Management indicated strong focus towards reducing the volatility in asset quality/profitability while being committed towards delivering a on its Mission 2025, RoA +2.5%. This is likely to be led by driving a higher share of premium customers, increase in share of newer and high yield products and lower credit costs. MMFS stock price has been rewarded with the mgmt’s reinvigorated focus on key profitability and asset quality parameters (+61% over 1yr, +75% over 6m) and incremental returns will be driven with accurately achieving stated objectives. A rural slowdown and the 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 yields and higher credit costs not materially changing our estimated EPS. Maintain BUY with a revised target price of INR343 (values MMFS core business at 1.8x FY25e for FY25e RoEs of 16.7%).

* Robust AUM growth continues: In 1QFY24, disbursements stood at INR 122bn (+29% YoY/ -12% QoQ). Business assets grew (+4.8% QoQ, 28% YoY) at INR 867bn led by sharp uptick in Cars segment (+10% QoQ). Growth in other segmente was also steady at 4.8% except slight slowdown in tractor segment (-2.7% QoQ). Mgmt. highlighted that the demand in pre-owned segment has started picking up and it would be a key focus for near term. We estimate AUM CAGR 28% over FY23-25E aided by acceleration in vehicles sales and price increase and scaling up of new initiatives such as SME lending and vehicle leasing. ? Higher cred

* Higher credit costs led to PAT miss: NII stood at INR 15.8bn (+5.3% YoY, -1% QoQ) on account of NIMs (reported) decline of 60bps QoQ led by increase in cost of funds by +20bps and yields decline of -40bps QoQ. Mgmt. guided for margins to remain range bound /expand from here on as the share of high yield pre-owned traction is increasing gradually. Opex was lower due to lower fee expense which led to healthy PPoP of INR 10bn (+5.7% YoY, +5.9% QoQ, +1.3% JMFe). Higher than expected credit costs (majorly due to change in write off policy) led to PAT miss at INR 3.5bn (+58% YoY, -48% QoQ). We forecast PAT CAGR of 31% over FY23-25E with cost-to-assets avg at 2.8%.

* Asset Quality improved; write-offs continue: Asset quality improved sequentially as Gross stage 3 declined -14bps QoQ at 4.35% while net Stage 3 declined -9bps QoQ at 1.78%. PCR remains healthy at 60% (+68bps QoQ). Restructured assets are now down to 2.1%

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