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Performance thrives, outlook brightens

M&M Financial Services is a non-banking financial company providing asset finance and other financial products and services in rural and semi-urban markets.

* Net interest income recorded a 15.9% YoY growth to Rs. 1,894cr in Q1FY25, led by increased interest income.

* Gross non-performing assets (NPA) and net NPA ratios stood at 3.6% and 1.5% respectively, reflecting seasonal deterioration in asset quality. The provision coverage ratio was 59.8%.

* M&M Financial Services delivered decent numbers in Q1FY25. The company will focus on improving asset quality and disbursements. Increased financing of select asset classes, enhanced collections, insurance tie-ups, and cost optimisation are expected to improve yields, boost margin and improve returns. Therefore, we upgrade our rating on the stock to ACCUMULATE with a revised target price of Rs. 330 based on SOTP valuation

Lower credit costs drive the bottomline

Interest income rose 20.7% YoY to Rs. 3,722cr in Q1FY25, while interest expenses increased 26.1% YoY to Rs. 1,829cr. As a result, net interest income grew 15.9% YoY, reaching Rs. 1,894cr. However, net interest margin contracted 20bps YoY to 6.8% due to growth in interest earnings assets. Operating expenses expanded 18.1% YoY to Rs. 797cr, driven by higher employee costs and other operating expenditure. That said, provisions declined 14.9% YoY. Thus, net profit grew 45.5% YoY to Rs. 513cr on the back of lower provisions along with sustained growth in assets under management (AUM) and reduced credit costs.

Disbursements growth slows down

Disbursements clocked a relatively moderate growth of 4.7% YoY, reaching Rs. 12,741cr. But this was weighed down by disruptions caused by elections, heat waves in the north and floods in the northeast. That said, the commercial vehicles segment showed a significant improvement of 11% YoY. Other asset classes also recorded growth, with passenger vehicles increasing 3% YoY, pre-owned vehicles 2%, threewheelers 3% and SME 68%. However, tractors and other asset classes declined 7% and 10% YoY, respectively. On the asset quality front, GNPA ratio edged up to 3.6% compared with 3.4% in Q4FY24 and NNPA to 1.5% from 1.3% in Q4FY24. In addition, the capital adequacy ratio touched 18.5% and the Tier 1 capital ratio stood at 16.4%, indicating strong capitalisation.

Key concall highlights

* The company aims for low double-digit growth in disbursements in the coming quarters.

* The company expects credit cost to be 1.4% in FY25 and ~1.2-1.3% in FY26 and the fiscals to follow.

* It expects net interest margin to remain around 7% in the near to medium term

Valuation

The company’s focus on improving asset quality and disbursement growth will put it in a favourable position. It plans to increase financing of certain asset classes to enhance margin and aims to reduce credit costs and the provision coverage ratio by improving collections and settling losses. In addition, a corporate agency licence and insurance tie-ups are expected to boost its fee income. Cost optimisation efforts are anticipated to aid return on assets and net interest margin in the coming quarters. We remain confident about the company’s prospects and, therefore, upgrade our rating on the stock to ACCUMULATE with a revised target price of Rs. 330 based on SOTP valuation.

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SEBI Registration Number: INH200000345