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* MMFS reported Q2FY23 earnings of ~Rs4.5bn, around 29% above our estimates due to lower-than-expected credit costs. Reversals in stages 2 & 3 provisions resulted in credit cost of ~1.1% vs our estimate of ~2.8%. Disbursements grew 24.8% QoQ/82.6% YoY, driven by the auto/UV (+32% QoQ), pre-owned vehicle (+25% QoQ) and SME/others (+81% QoQ) segments. The strong momentum sustained in Oct-22, with disbursement at Rs52.5bn vs Rs40.8bn in Sep-22. AUM grew 9.7% QoQ/13.8% YoY. Calculated yields declined 47bps QoQ, due to changes in asset-mix resulting in decline in share of higher-yielding products, introduction of better-quality albeit low-yielding customers to the portfolio for cash-flow stability, and lag in transmission of ~50bps rate hikes in some vehicle-finance products. CoFs rose 27bps QoQ, in line with our estimates. These factors, combined with high liquidity maintained by MMFS (~4-month buffer) on its books (25-30bps impact), resulted in calculated NIM decline of 68bps QoQ. Management believes yields will improve going ahead, once preowned vehicle availability improves and tractor sales pickup, for which the favorable season is around the corner. Opex remained elevated going into the festive period, with cost-toincome at 43.9% (Q1: 39.6%) due to higher business volumes and continued investments in technology. As a result, PPOP stood at Rs8.6bn (-8.7% QoQ/-15% YoY).

* Headline asset-quality numbers significantly improved, with GS3 and NS3 declining 133bps and 62bps to 6.7% and 2.91%, respectively. PCR on stage-3 assets was sequentially flat at 58.2%. The restructured book stood at ~Rs30bn (4.1% of business assets) vs. Rs36bn (5.3% of business assets) in Q1. In its Oct-22 update, MMFS reported that its GNPA under the revised IRACP norms was ~Rs9bn higher than GS3 as per Ind-AS. Quelling investor concerns, MMFS also stated that it does not foresee the need to make any additional provisions on account of the migration to IRACP.

* As regards the repossession ban passed by the RBI, MMFS believes that there has not been any breach of process, with the unfortunate event being an accident. The agency used for repossession was not exclusive and provides services to the entire industry. Management is confident that post the outcome of the investigation, re-engagement with the RBI based on the findings will result in a reversal of the ban, within 1-2 quarters. Nevertheless, to mitigate the impact of the ban, MMFS has migrated ~6,000 employees from manpower staffing agencies on its rolls under a fixed-term contract. This action is expected to be cost-neutral, with expenses being reclassified from ‘other expenses’ to ‘employee benefit expenses’ in its income statement.

* MD Mr. Ramesh Iyer’s term ends in April/June 2024. For now, there is no certainty regarding the succession plan (i.e. hiring within the Mahindra group, within MMFS, or from outside). The nomination and remuneration committee (NRC) will deliberate on the matter and the succession plan would be made known to the shareholders well in advance.

* We retain our HOLD rating on the stock with Sep-23E TP of Rs220/share (earlier Rs200), valuing the firm at 1.4x Sep-24E BVPS, using the excess return on equity for Sep-24E RoE of ~14%. Any downturn in rural demand presents a downside risk to our valuation. Upside risks include faster-than-expected pick-up in growth.

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