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Earnings volatile; Second consecutive quarter of big miss

NIM compression and high credit costs led to below par performance

* Mahindra & Mahindra Financial (MMFS)’s 2QFY24 PAT declined 48% YoY to INR2.35b (44% miss). Reported NII rose 9% YoY to INR16.7b (6% miss), while PPoP grew 9% YoY to ~INR9.4b (10% miss).

* Annualized credit costs of ~2.8% (vs. 2.5% in 2QFY23) were higher than expectations and included ~INR3.5b of write-offs (vs. ~INR3.1b in 1Q).

* In 2QFY24, yields (calc.) moderated ~35bp QoQ, while CoF (calc.) rose 10bp, leading to a NIM contraction of ~45bp QoQ. Yield moderation was attributed to a rising proportion of PrimeX customers, stronger growth in loweryielding Utility Vehicles and no interest rate hike on incremental lending.

* We cut our FY24E EPS by ~12% to factor in a higher NIM compression and elevated credit costs in 1HFY24. We model an 18%/21% CAGR in AUM/PAT over FY23-FY26E, with FY25E RoA/RoE of 2.2%/15%.

* Until two quarters ago, MMFS had managed to reduce volatility in its NIM and earnings performance by streamlining operations and enhancing risk management. MMFS has now reported two consecutive quarters of NIM volatility and elevated credit costs (despite minor improvements in asset quality). Such repeated volatility in NIM and credit costs could affect investor confidence in its transformation journey.

* We believe that MMFS should see improvements in NIM and a moderation in credit costs in 2HFY24. Retain BUY with a revised TP of INR330 (based on 2.0x Sep’25E BVPS).

* Key risks: a) yields remaining muted because of higher competitive intensity, b) overall provision coverage ratio remaining elevated longer than expected because of the intricacies of the ECL model.

Key takeaways from the management commentary

* It has guided for business asset growth of 20%+ in FY24. With interest rates remaining elevated, it will monitor retail volumes in Diwali and might revise its AUM growth guidance in 4QFY24.

* The management said that it will take nine months before the PCR cover starts improving since LGD has been impacted because of the Covid period being the base. However, PD continues to improve.

Valuation and View

* MMFS is going through a transformation in its product/customer mix and its NIM profile will change and find its new sustainable normal. It would hopefully now start demonstrating more predictability in its earnings performance. A strong liability franchise and deep moats in rural/semi-urban customer segments position MMFS well to reap rewards of the hard work that is going into evolving this franchise.

* MMFS currently trades at 1.7x Sep’25E P/BV. Risk-reward is favorable for a PAT CAGR of ~21% over FY23-FY26E and FY25E RoA/RoE of 2.2%/15%. Maintain BUY with a revised TP of INR330 (based on 2.0x Sep’25E BVPS).

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