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Earnest attempt at a credible transformation!

* MMFS has exhibited volatile operating performance and weak asset quality in the past. However, the management has undertaken various strategic initiatives, which we believe, if executed properly, could script a credible transformation of the company.

* MMFS has translated the KPIs introduced under Mission 2025 into strategic priorities, such as expanding its presence, leveraging technology to drive operational efficiency, developing new products and making process enhancements. The management is committed to investing in new capabilities and advanced technological solutions to reduce volatility in the company’s operating performance.

* In the last fiscal year, MMFS strengthened its leadership position in the tractor, Mahindra Auto and non-Mahindra financing segments with improvement in market shares. The improved rural cash-flows should support demand sentiment in FY24. The company is also increasing its penetration in the used vehicle segment.

* We believe that this transformation is only half-complete. Given the change in product/ customer mix, blended NIM will find a new normal within the next few quarters, but the tech transformation that the company is embarking on should help MMFS improve its operating efficiency and credit costs.

* Strong moats in the rural/semi-urban customer segments position MMFS well to reap the rewards of the hard work that is going into evolving this franchise. We model a CAGR of 19%/20% in AUM/PAT over FY23-FY25E, with RoA/RoE of 2.3%/15.4% in FY25E. We have a BUY rating on the stock with a TP of INR350 (premised on 2.2x FY25E P/BV).

Transformation at play: Aims to deliver sustained and stable outcomes

We hosted Mr. Raul Rebello, ED and MD & CEO designate, MMFS, as a part of the CEO Track at AGIC CY23

* MMFS has set three goals for sustainable growth and three goals for protected profitability. The company’s business assets were stuck at ~INR650b for three years and its guidance of doubling the AUM was driven by the belief that sectoral tailwinds and strong execution should help it deliver a 24-25% AUM CAGR.

* MMFS is cognizant of the horizontal and vertical risks and has improved its origination quality. MMFS now has guardrails to know how many new-tocredit, prime and sub-prime customers it adds every month.

* MMFS will keep its core strong and will make sure that it does not lose the heft in vehicle lending. ~10-15% of the incremental sourcing every month comes from prime customers. Non-cash collections have improved to ~70% (vs. 30% earlier), which will help to lower the collection costs and eventually opex.

Transformation initiatives to revolutionize its business practices

* In order to realize its Vision 2025, MMFS has implemented various strategies and set specific objectives viz.: 1) scaling up new growth engines, 2) shifting the composition of customer segments, 3) diversifying product mix, 4) establishing dedicated collection rooms and legal toolkits, and 5) equipping employees with cutting-edge technology to enhance efficiency and drive process optimization.

* MMFS is also implementing Udaan – an end-to-end transformation backed by technology and digital capabilities. As part of this initiative, it is strengthening its technology infrastructure to make the organization future-ready for fast-paced growth. This will include various programs aimed at improving the lending journey of customers, as well as sourcing, underwriting, cross-selling and collections for the company.

* This transformation is poised to yield several benefits, such as an enhanced experience for customers, a faster turnaround time, and strong digital capabilities.

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