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Mahindra Finance reported earnings at Rs3.5bn (23% below our estimates), up 58% YoY. Earning miss was largely attributed to higher loan losses due to increase in LGD provisions while write-offs remained at 1.6% of opening gross loans. NIMs disappointed. CoF were in line with our estimates, however, interest yields were lower due to change in product mix. NIMs (calculated) were down 58bps QoQ to 7.8%. Opex was controlled at 2.8% of assets while on a full year basis it is likely to inch up to 3%. Disbursements and AUM growth remained strong, each being up 28% YoY. Gross Stage 3 assets improved 14bps QoQ to 4.3% while Gross Stage 2 deteriorated 42 bps QoQ to 6.4%. Stage 3 PCR was at 60%. GNPA (IRACP norms) stood at 5.67% (down 26bps QoQ). Management remains confident of improvement in Stage 3 assets and lower provisions for FY24 due to various underwriting changes and collection initiatives. We pencil in AUM growth of 22% and 18%, NII growth of 17% and 19% and profit growth of 10% and 24% for FY24E and FY25E, respectively. We build in NIMs compression of 48bps YoY and expect full year NIMs (on BS loans) at 7.8% for FY24E. We expect RoA and RoE to reach 2.2% and 14.4% by FY25E. We value standalone business at 2.5x FY25E P/ABV (unchanged), and assign a value of Rs 19 to its subsidiaries to arrive at our Target Price of Rs350 (unchanged). Given the recent stock price correction, we upgrade Mahindra Finance to Buy.

Strong traction in Auto/UV, pre-owned and Cars segment

AUM in Auto/UV, pre-owned and Cars segment was up 32%/40%/28% YoY, respectively. Tractor AUM was up 11% YoY and CV/CE registered a growth of 17.4% YoY. Disbursements in Auto/UV, Cars and pre-owned vehicles was up over 30% YoY. Surprisingly, disbursements in MSME and others segments was down 20% YoY.

NIMs impacted by lower yield and increase in CoF

Increased competitive intensity, change in product and customer mix led to 86bps/43bps YoY/QoQ decline in Interest yields (on BS loans) to 14.9%. CoF (calc) stood at 7.54% in line with our expectations. Opex was down 13.3% QoQ, at 2.8% of assets. However, it may go up as the NBFC continues to invest in project Udaan.

Key takeaways from the call

Mahindra Finance has gained market share in core segments while accelerating growth in pre-owned vehicles. Interest yields were down due to run-off of high yield products. Prime customers contribute 10-12% of overall AUM. Company has taken price hikes in select product and is focussing on pre-owned vehicles to improve interest yields from hereon. CoF may increase as maturing debt gets repriced, it is 2-3 quarters away from witnessing any decline in CoF. Asset quality will continue to improve and credit costs on a full year basis will range between 1.5%-1.7%. Write-offs will be in broad range (1.6%) of 1Q performance.

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