Buy Mahindra & Mahindra Financial Ltd For Target Rs.335 by Motilal Oswal Financial Services Ltd
Operationally in line; earnings beat aided by provision release
NIM improves ~10bp QoQ; macro environment remains challenging
* Mahindra & Mahindra Financial (MMFS)’s 3QFY25 PAT grew ~62% YoY to ~INR9b (~31% beat). NII stood at INR19.1b (in line) and grew ~13% YoY. Other income rose ~60% YoY to ~INR1.9b, driven by healthy fee income.
* NIM (calc.) improved ~10bp QoQ to ~6.7%. Credit costs stood at ~INR91m, resulting in annualized credit costs of ~3bp (PQ: ~2.6% and PY: ~1.4%). Credit costs were benign, driven by the ECL provision release of INR4.3b in 3QFY25. Between Mar'21 and Jun'21, there was an addition of ~INR40b to the GS3 reference pool. MMFS demonstrated much better recoveries in this incremental pool, which resulted in lower LGDs in the ECL model.
* Management shared that disbursements in vehicle finance (particularly PVs and tractors) saw a positive momentum during the quarter, and it guided for mid-to-high-teen loan growth in FY26. We model loan growth of ~17% in FY25 and ~16% loan CAGR over FY24-FY27E.
* MMFS acknowledged that the macro environment is tough and that more efforts are being put into collections. Despite that, with focused efforts, the company managed to keep its asset quality largely stable with GS3 rising only ~10bp QoQ. It continued to guide for credit costs in the range of ~1.3%-~1.5% in FY25. We estimate a ~29% PAT CAGR over FY24-FY27, with FY27E RoA/RoE of 2.3%/16%. Reiterate BUY with an unchanged TP of INR335 (based on 1.7x Sep’26E BVPS).
* Key risks: a) yield compression because of higher competitive intensity and a change in product mix, b) weakening of auto demand resulting in muted loan growth, and 3) volatility in PCR and credit costs continuing like earlier.
NIM expands ~10bp QoQ due to yield improvement & higher fee income
* Yields (calc.) rose ~20bp QoQ to ~14.4%, while CoF (calc.) rose ~10bp QoQ to 7.9%. This led to ~10bp expansion in spreads.
* NIM (calc.) improved ~10bp QoQ to ~6.7%. Management shared that NIM improvement over the medium to long term will come from a combination of asset diversification and improvement in fee income.
* The company guided a NIM of 6.5-6.7% in FY25 with a long-term target of ~7.0%. We expect the company’s NIM to improve in a declining interest rate environment and estimate NIM to improve ~25bp in FY26 to ~7.0%.
Key takeaways from the management commentary
* Management shared that LGD reduction and PCR rationalization benefits have crystallized in the current quarter. Going forward, the Stage 3 PCR could exhibit a minor uptick but remain within the range of 51-54%. The company could also look at creating a management overlay in the future.
* Tier 1 stood at ~15% as of Dec’24. Management shared that the company will begin preparations to raise equity capital at an appropriate time.
* Within used vehicles, the LCV/HCV business is not growing, and replacement demand in this segment is muted. MMFS acknowledged that it could have executed better in its pre-owned vehicles segment.
Valuation and View
* MMFS exhibited improved disbursement momentum during the current quarter, supported by robust growth in vehicle financing, particularly in PVs and tractors, despite subdued performance in the CV segment. The company reported benign credit costs, aided by provision releases from lower provision cover (PCR) following its annual ECL model refresh.
* MMFS currently trades at 1.3x FY27E P/BV. Risk-reward is favorable for a PAT CAGR of ~29% over FY24-FY27E and RoA/RoE of 2.3%/16% in FY27E. Reiterate BUY with an unchanged TP of INR335 (based on 1.7x Sep’26E BV).
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