Buy Mahindra Finance Ltd for the Target Rs 370 by Emkay Global Financial Services Ltd
Supported by broad-based disbursement growth, benign asset quality, and contained credit cost, MMFS reported a healthy 2QFY27. PAT was up 55% yoy to Rs8.82bn and AUM rose ~15% yoy to Rs1.47trn, aided by strong momentum in the non-wheels segment. GS2+GS3 fell to a multiyear low of 8.1%, with the usual seasonal deterioration in 2Q largely absent. Management sees existing overlays of Rs8.52bn as an adequate cushion against external stress, and currently sees no need to build more. However, it flagged near-term headwinds: rising COF amid rate hikes, draft insurance-commission norms that could dent fee income, drought-related collection risk, and softer early festive demand, particularly in tractors. Margins remain at the lower end of the level needed for target ROA, though the drag from excess liquidity and trade advances should ease. Management retained its medium-term guidance on growth, credit cost, and ROA, and said the MRHFL merger is on track. Factoring in these near-term headwinds, we cut our FY27-29 estimates, resulting in a 1-2% cut in our FY27- 29E EPS. We maintain BUY while lowering our Sep-27E TP by ~10% to Rs370 (Rs410 earlier), implying FY28E PBV of 1.7x.
Strong quarter overall
MMFS delivered a good 2QFY27, with PAT up 55% yoy to Rs8.82bn, driven by contained credit cost of 1.6% (vs 2.2% in 2QFY26 and 1.5% in 1QFY27) and moderating opex. Margins were flat yoy at 7.0% but contracted by ~30bps qoq due to excess liquidity and seasonal trade advances, which management expects to normalize. Higher fee income and stable COF partly offset the decline, keeping 1H margin at 7.1%, in line with guidance. Asset quality continues to improve, with GS2+GS3 at 8.1% and PCR at 56.6%.
Steady outlook, but COF, insurance, and drought risks linger
Management retained its medium-term targets of 16–18% AUM growth, GS2+GS3 of <10%, 1.3–1.7% credit cost, and 2.2–2.5% ROA. Wheels should grow slightly ahead of the industry, with SME, PL, and mortgages driving alpha, though the high 2H base could weigh on disbursements. Margins face COF pressure, as ~48% of borrowings are floating (mostly repo/T-bill-linked) and ~Rs270bn matures over the next six months, while the largely fixed-rate wheels book reprices via new loans. Pricing on new loans, faster nonwheels repricing, fee levers, and an easing liquidity/trade-advance drag should partly offset this, keeping NIM near the ~7% needed for target ROA. Draft insurancecommission norms remain a risk to fees. With 1H stress already contained, the usual 2H seasonal improvement is likely to be muted, limiting further credit-cost gains, and the drought's impact on tractor collections will be clearer once half-yearly installments fall due. Mortgages may initially dilute ROA, but the MRHFL merger should remove duplication and simplify distribution.
Adjust estimates; maintain BUY with a revised TP of Rs370
Factoring in the 2QFY27 performance and near-term headwinds from rising COF, insurance-commission norms, and drought-related risks, we cut our FY27–29E EPS by 1–2% (Exhibit 2). We maintain BUY but lower our Sep-27E TP to Rs370 (from Rs410), implying 1.7x FY28E PBV
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