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Steady show

M&M Financial Services’ (MMFS IN) Q2FY27 PAT of INR 8.8bn (ROA of 2.2%) ; up 55% YoY with PPOP of INR 17.9bn (+20% YoY) , came -in 3 -6% below our estimate. High liquidity buffer (INR 161.5bn , up 10% QoQ and 90% YoY ) led to gross spread co ntracting by 30bp s QoQ to 7.0%. Disbursements grew 22% YoY, driving AUM growth of 15% YoY. Credit cost of 1.6% (down ~60bp YoY) stayed within the guided 1.3 -1.7% band, and GS2+GS3 fell to a record -low of 8.1% (down 30bps QoQ and 160bps YoY). Management retained medium -term targets – AUM growth of 16 -18% and ROA of 2.2 -2.5% – but flagged rising cost of funds, a softer start to the festival season versus last year and draft insurance -commission norms as headwinds. Subsidiaries added to earnings – MRHFL ’s PAT tripled YoY to INR 0.35bn and MIBL ’s PAT rose 2.5x to INR 0.49bn , lifting consolidated PAT 61% YoY to INR 9.1bn. Retain Accumulate.

Broad-based growth:

Disbursements grew 22% YoY to INR 165bn, led by 3W (up 32% ), PV (up 28%), CV / CE (up 16% ) and pre -owned vehicles (up 15%), with tractor and SME up 13% each . AI -orchestrated channels contributed INR 16.6bn (~10%). Wheels disbursements rose 21% YoY and non -wheels 52%, taking non -wheels to 20% of consolidated lending AUM of INR 1.56tn. Standalone AUM grew 15% YoY and 7% QoQ to INR 1.47tn, as the ‘Others’ share r ose to 8.2% from 5.3% sequentially on higher than usual trade advances. Trade advances were deployed above normal to support festiv al season -led growth in Q3. MRHFL ’s disbursements nearly doubled YoY to INR 11.3bn, with its merger into the parent targeted from 1 April 2027. Management retains 16 -18% medium -term AUM growth

Asset quality trends displaying reduced volatility:

GS3 fell 3bp s QoQ to 3.42% and GS2 ~20 bps to 4.70%, taking GS2+GS3 to 8.1% (Q2FY26: 9.7%), breaking from the usual Q2 spike. Credit cost rose by 5bps QoQ to 1.55% (vs . +23bp s a year ago), with end losses steady at 1.2%. Management overlays of INR 8.5bn remain intact with no further planned build -up . Management retained its credit -cost guidance of 1.3-1.7% but highlighted drought risk in 282 districts . Tractor stress will be clearer at the half -yearly instalment cycle. The liquidity buffer was raised to INR 161.5bn as a precaution against West Asia crisis and El Niño risks.

Retain Accumulate with a revised March 2027E TP of INR 350:

We view the risk -reward turning favorable – steady operational delivery in FY26 -Q2FY27 underscore MMFS striking a good balance between asset yields, asset quality and growth . However, near -term headwinds persist from rising cost of funds on a fixed -rate dominated AUM , a softer start to the festiv al season , drought risk in tractor markets and potential fee dilution from draft insurance -commission norms. We retain our FY27E -29E estimates but cut our Mar ’27E SOTP -TP to INR 350 (from INR 380) as we capture higher yields driving our COE to 12.7% (from 12.1%), with the core lending business accounting for ~83% of SOTP. Key risks are weakness in rural / agri economy driving lower -than -anticipated AUM growth / asset quality blips and overdependency on M&M ecosystem.

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