IGI Logo

* Mahindra & Mahindra Financial (MMFS) reported strong earnings beat with 4QFY23 PAT of INR6.8b, which grew 14% YoY. The growth was aided by a sharp improvement in asset quality that translated into almost NIL credit costs despite write-offs of ~INR6b during the quarter.

* FY23 PAT of ~INR19.8b grew ~101% YoY. FY23 credit costs stood at 1.35% while RoA/RoE stood at 2.3%/13.0%.

* MMFS has made a good progress towards its Mission 2025 targets across AUM growth, asset quality, NIM and RoA. With process enhancements across sourcing, underwriting and collections, we expect the asset quality improvement to sustain and now model lower credit costs of ~1.7%/1.9% in FY24/FY25. Margin compression (in a rising rate environment) can be partly mitigated by the change in product mix.

* We raise our FY24E/FY25E PAT by 10%/13% to factor in higher loan growth and lower credit costs. We model an AUM and PAT CAGR of 20% and 19% over FY23-FY25E for an FY25 RoA and RoE of 2.3% and 15.0%, respectively.

* Given the volatility in performance that the company has demonstrated in the past, we have ourselves closely watched its transformation over the last six quarters with some skepticism. While Dr. Anish Shah (Chairman, MMFS) himself acknowledged that the transformation envisaged in MMFS is only half-way complete, we are ready to believe in this transformation journey of MMFS. Reiterate BUY with a revised TP of INR320 (premised on 2.0x FY25E BVPS).

* Key risks: a) Higher exposure to rural India will keep it vulnerable to poor monsoons even though the vulnerability will be lower than in the past, b) slowdown in vehicle demand due to macro factors.

Disbursement growth healthy; gaining market share across products

* Business assets at ~INR828b grew 27% YoY. Disbursements at ~INR138b grew 50% YoY in 4QFY23 while FY23 disbursements rose ~80% YoY.

* The synergies between the parent M&M and MMFS have improved, which is aiding the healthy loan growth across all the different product segments. Management shared that the company has steadily gained market share across all its vehicle offerings.

Investments in strengthening processes will keep opex elevated

* Opex-to-average assets in FY23 stood elevated at 3.2% because of investments in technology platforms and legal toolkits. Management guided that the opex ratio will continue to remain elevated and remain range-bound at similar levels in FY24.

* We model opex-to-average assets of 3.1%/2.9% in FY24/FY25E.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer