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Positive surprise on credit cost; sustainability key to rerating

M&M Financial Services (MMFS) reported PAT of INR 5.5bn (-0.3% YoY, +23% QoQ) significantly higher than our estimates primarily driven by meaningfully lower credit cost (1.2% vs 2.4% QoQ) and improvement in NIM (6.64%, +20bps QoQ). Lower credit cost was on account of ECL model revision, better collection efficiency and lower write offs, which was a favourable outcome. Management indicated its prudent shift towards better quality customers is expected to keep credit costs in check. NII of INR 16.9bn (+10% YoY, +7% QoQ, +7% JMFe) was supported by yield expansion (+37bps QoQ) as it outpaced the increase in CoF (+18bps, QoQ). Although the opex remained elevated (opex-to-asset ratio 2.6%), meaningfully lower provisions (-48% QoQ) led to PAT beat. We believe the margins have bottomed out. Healthy Business Asset growth (+26% YoY, +4% QoQ) was led by strong growth in disbursements of INR 154bn (+6% YoY, +16% QoQ). Asset quality improved sequentially with GS3/NS3 at 3.97%/1.54% (-32bps/-20bps QoQ) and PCR at 63% (+154bps QoQ). Finally the efforts of stringent risk management are starting to pay off and although opex has remained elevated, its impact on ROA will be offset by gradual improvement in credit costs and normalization of margins. We believe sustainable delivery of asset quality metrics should drive the rerating going ahead. We value MMFS (parent) at 1.6x FY26E BV implying SoTP value of INR 345 per share with value of subs at INR 30 (MRHF INR 16 per share and MIBL at INR 13 per share).

Healthy AUM growth continues: In 3QFY24, total Business Assets grew to INR 970bn (+26% YoY, +4% QoQ) on the back of strong disbursements of INR 154bn (+6% YoY, +16% QoQ). The steady uptick in Business Assets was led by growth in Pre-owned vehicle (+36% YoY, +12% QoQ) and Auto/UV (+33% YoY, +10% QoQ) business. Mgmt. continues to exude confidence on growth aided by strong demand in Auto/UV segment (due premiumization and increasing ticket size), continued momentum in CVs and preowned vehicle segment. We estimate AUM CAGR of 27% over FY24-26E aided by acceleration in vehicles sales and scaling up of new initiatives on vehicle leasing.

Robust NII and controlled credit costs boost PAT: NII grew to INR 16.9bn (+10% YoY, +7% QoQ) on account of improvement in NIM (6.64%, +20bps QoQ) as yield expansion (+37bps QoQ) outpaced the increase in CoF (+18bps, QoQ). Although the opex remained elevated, due to branch expansion and tech spends (opex-to-asset ratio 2.6%, flat QoQ), meaningfully lower provisions at INR 3.3bn (-48% QoQ) led to a PAT of INR 5.5bn (-0.3% YoY, +23% QoQ), significantly higher than our estimates. We expect the margins to inchup from here on as the as the CoF stabilises and the impact of lending rate hike takes effect. We build in a PAT CAGR of 28% over FY24-26E.

Asset Quality improves due to lower write-offs and ECL revision: Asset quality improved sequentially with GS3/NS3 at 3.97%/1.54% (-32bps/-20bps QoQ). PCR remains healthy at 63% (+154bps QoQ). Credit cost (at 1.2% vs 2.4% QoQ) improved sequentially, partially on account of ECL model revision (positive impact of INR 861mn) and due to lower write offs (-11% QoQ). Management indicated its prudent shift towards better quality customers is expected to keep credit costs in check.

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