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Mahindra Finance reported disappointing earnings for 2QFY24. NIMs compression due to rising CoB is NBFC wide narrative however Mahindra Finance faced twin challenges - yield compression (upgrade to better customer segment and high proportion of interest free advances this quarter) and rising CoB. 2Q witnessed higher credit costs due to rise in provisions and write-offs led by tractor segment which faced an erratic monsoon. Opex/avg assets (2.85%) stays above the management guidance of 2.5%. AUM growth continues to remain strong however its translation into profitability is unpredictable. 2H is expected to be better as (1) management has initiated yield hike in certain portfolio and large chunk of dealer financing is expected to be converted into yield earning assets; (2) recoveries have been historically better in 2H which may reflect in lower credit costs; however opex may continue to remain elevated. Management reiterated its willingness to meet FY25 guidance on RoA of 2.5% and Gross Stage 3 of <6%. Lower yields, elevated opex and credit costs may push the RoA target ahead in our view. We build in RoA/RoE of 2.1%/13.5% in FY25E. Post 5%/10%/52% miss on NII/PPOP/PAT in 2QFY24, we have cut our earnings estimate by 14% for FY24E and 7% for FY25E. We value Mahindra Finance at 2x (2.5x earlier) 1HFY26E P/ABV to arrive at our Target Price of Rs 302. Downgrade to an Accumulate

Increase in loan loss provisions hit earnings

Mahindra Finance reported loan loss provisions of Rs6.3bn, up 19% QoQ and 2.2x YoY. 44% of the provisions were attributable to the increase in ECL coverage while the rest 56% were write-offs. Credit costs (on avg assets) for 1H stood at 2.3% and management expects to contain it in the range of 1.5%-1.7% (on avg assets) in FY24E driven by recoveries in 2H. Stage 2 / Stage 3 assets stood at 5.8%/4.3% down from 9.7%/6.7% in 2QFY23 and 6.4%/4.3% in 1QFY24, respectively. 30+ dpd is down to 10.1%

NIMs impacted by lower yield and increase in CoF

Reported spreads were down 100bps YoY and 30 bps QoQ to 6.5% as company moved up in terms of customer selection impacting yields. CoB continue to rise across companies and is expected to increase further in 2H. Management eluded to increasing lending yields in certain geographies and products as well as focus on high yielding products of tractors and two wheelers. In our view, competitive intensity may limit company’s ability to raise lending yields in its target customer segment however, decline in share of dealer funding may positively impact yields next quarter. Calculated NIMs (on BS loans) was at 7.3%, down 140bps YoY and 46bps QoQ.

AUM growth continues to remain healthy, disbursement growth decelerates to 13%

Disbursements growth decelerated to 12.6% YoY after registering 28%+ YoY growth in previous 9 quarters. AUM growth remained strong, up 27% YoY and 8% QoQ to Rs 937 bn driver by strong disbursements in previous quarters and dealer financing in prefestive quarter. Company expects to maintain AUM growth above 20% and will revisit guidance post festive season.

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