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Steady growth outlook, asset quality monitorable

Q4 disbursement growth picked up to 11% YoY led by growth in tractor, Used CV and PV. AUM grew 12% YoY to Rs1,341bn; we build 13%/ 13.5% for FY27/ FY28E. While bond yields have hardened resulting in a higher CoF, expect FY27 margins to be stable aided by a favourable mix and increase in fee-based income. Opex cost is expected to remain range-bound as the company invests in business transformation/ diversification. Asset quality trend showed an improvement; we remain watchful and build a credit cost of 1.7%/ 1.6% for FY27/ FY28E. We cut FY27/28E earnings by 6-7%, factoring a slowdown in growth and higher than anticipated cost of borrowing. We value the standalone business of MMFS at 1.3x FY28E P/ABV. Our SOTP ascribes a valuation of Rs 309 for the standalone business and Rs 21 for subsidiaries, with a 25% Holding Co. discount, to arrive at a TP of Rs 325. While disbursement run-rate has picked up, asset quality continues to be a monitorable. Maintain ACCUMULATE.

Expect 13% AUM growth in FY27E:

Q4 disbursements saw a pick-up (+10.7% YoY to Rs171.8bn) with a strong uptick in tractor (+63% YoY). Company expects the momentum continue in FY27, factoring in some impact of a high base. Strong volume growth in the Used CV and PV segment was noted (+16.5%/ 14.8% YoY respectively) and company continues to focus on these businesses. Vehicle finance strategy reflected a calibrated shift towards higher share of LCV and Small CV. SME and mortgage grew by 34.5%/21% YoY respectively in Q4FY26. Consequently, AUM grew 12% YoY/ 4% QoQ to Rs1,341bn. While the wheels business is expected to grow in-line with market trends, company expects to increase the share of non-wheels with SME/ mortgage growing at a pace of ~30%-40%. Management has guided for mid teen AUM growth for FY27; we build 13%/ 13.5% in FY27/ FY28E.

Levers in place for margin expansion:

Reported NIMs expanded by 101bps YoY and 60bps QoQ to 7.5% in Q4FY26 driven by a reduction in cost of funds. NIM guidance is maintained at 7.1% (+/- few bps) supported by multiple levers

i) Higher contribution from fee-based income

ii) Reduction in cost of funds post Rights issue

iii) Favorable product mix (higher share of tractor/ Used CV). Management expects fee to assets ratio to sustain at 1.4%-1.5% over the medium-term (vs. 1.1% in FY25), with a focus on cross-sell potential (12 mn+ customers, 2.4 products per customer). However, cost of borrowing at 7% in Q4FY26 has bottomed out and with yields hardening management expects the borrowing cost to inch up going forward. We increase margins slightly by 10bps for FY27E taking into consideration favorable product mix/higher fee income offset by a higher cost of borrowing. Management expects opex to remain range-bound (Opex/AUM ratio at 3.1% in 4Q) as the company continues to invest in the franchise.

Watchful of asset quality trends:

Gross Stage 3/Net Stage 3 ratio saw an improvement to 3.41%/1.44% vs. 3.80%/ 1.82% in Q3FY26. Company has made a management overlay of Rs2.7bn as a buffer against geopolitical and monsoon-related headwinds. Hence the PCR has increased to 58.6% in Q4FY26 from 53% in Q3FY26. Collection efficiency has remained broadly stable QoQ with no material deterioration observed except i) some disruptions in TN, West Bengal and Assam and ii) some impact on remittances due to geopolitical factors. Management expects credit cost to trend in the range of 1.3-1.7% (vs. 1.5% in Q3FY26). We continue to be watchful of asset quality and build a higher credit cost of 1.7%/ 1.6% for FY27/ FY28E.

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