Buy Mahindra & Mahindra Financial Ltd for the Target Rs. 350 by Motilal Oswal Financial Services Ltd
GST rate cuts could prompt strong business volumes in 2HFY26
Earnings beat driven by higher other income; credit costs elevated
* Mahindra & Mahindra Financial’s (MMFS) 2QFY26 PAT rose ~54% YoY to ~INR5.7b (~13% beat). PAT in 1HFY26 grew 25% YoY, and we expect PAT in 2HFY26 to grow 17% YoY. NII in 2QFY26 stood at INR21.1b (inline) and grew ~17% YoY. Other income rose ~73% YoY to ~INR3.1b, driven by healthy fee and dividend income of INR536m received from MIBL during the quarter (PQ: INR464m).
* NIM (calc.) rose ~12bp QoQ to ~6.8%. Opex stood at ~INR9.2b (up ~16% YoY) and the cost-income ratio stood at ~38% (PQ: ~41% and PY: ~40%). PPoP stood at ~INR15b (in line) and grew ~25% YoY.
* Credit costs stood at ~INR7.5b (inline). Annualized credit costs stood at ~2.4% (PQ: ~2.2% and PY: ~2.6%). Collection efficiency in 2QFY26 improved marginally to ~96% (PY: 95%).
* Management shared that the last week of 2Q exhibited an improvement in business momentum, which further strengthened in Oct’25. The company expects this positive trend to continue through 3Q and 4Q, supported by a broad-based recovery in demand following the GST rate cut. The company guided for AUM growth of ~15% in FY26, supported by 18-20% disbursement growth in 2HFY26, as demand has revived in the PV and tractor segments post the GST rate cut.
* MMFS’s asset quality performance during the quarter was better than historical trends. The company remains confident of further asset quality improvement in 2H and has guided for credit costs of ~1.7% in FY26, despite elevated levels in 1H. We model credit costs (as a % of avg. assets) of 1.7%/1.6% for FY26/FY27E.
* We increase our FY26/FY27 PAT estimates by 10%/6% to factor in a recurring higher dividend income from its insurance broking subsidiary. We estimate a ~19% PAT CAGR over FY25-FY28E, with FY28E RoA/RoE of 2.2%/14%. Reiterate BUY with a TP of INR350 (based on 1.7x Sep’27E BVPS).
* Key risks: a) yield compression due to higher competitive intensity from banks, b) strong auto demand during the festive season fizzling out in the coming quarters, potentially leading to muted loan growth, and 3) any volatility in PCR and credit costs.
NIM expands ~12bp QoQ; yields (calc.) decline ~35bp QoQ
* Yields (calc.) declined ~35bp QoQ to ~13.8% and CoF (calc.) declined ~35bp QoQ to 7.3%, leading to stable spreads QoQ at 6.5%. NIM (calc.) expanded ~12bp QoQ to ~6.8%.
* Management indicated that the expansion in NIM during the quarter was driven by a combination of lower CoF, higher fee income, and reduced leverage following the rights issue. The company expects NIMs to remain steady at current levels. We model NIMs of 6.8%/6.9% for FY26/FY27E.
Key takeaways from the management commentary
* MMFS remains optimistic about 2HFY26, driven by a recent pickup in volumes and the favorable impact of GST cuts, with particularly strong traction observed in the tractor and PV segments.
* The share of used vehicle disbursements increased to 18% from 16-17% earlier, driven by both existing customers and open-market channels such as Mahindra First Choice, online aggregators, and offline dealer networks, with the segment remaining RoA accretive.
* MMFS plans to accelerate disbursements in its housing subsidiary following stabilization in asset quality, supported by new leadership hires, while maintaining focus on improving operating efficiency and building a profitable, well-disciplined franchise.
Valuation and view
* MMFS reported an operationally mixed quarter, marked by muted disbursements and loan growth, largely impacted by deferred auto sales between mid-Aug and mid-Sep amid expectations of a GST rate cut. Asset quality exhibited minor seasonal deterioration, marked by elevated credit costs, higher slippages, and continued higher levels of write-offs. On a positive note, NIM expanded ~12bp QoQ, driven by benefits on CoF and reduced leverage from the completion of the rights issue.
* MMFS currently trades at 1.5x FY27E P/BV. With a projected PAT CAGR of ~19% over FY25-FY28E and RoA/RoE of 2.2%/14% in FY28E, we reiterate our BUY rating with a TP of INR350 (based on 1.7x Sep’27E BV).
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