Buy Mahindra & Mahindra Financial Ltd for the Target Rs 375 by Motilal Oswal Financial Services Ltd
Stable quarter; rising CoF to weigh on NIM Good progress on minimizing inter-quarter volatility; asset quality improves
* Mahindra & Mahindra Financial’s (MMFS) 2QFY27 PAT rose 55% YoY to INR8.8b (~7% beat). NII grew 13% YoY to INR23.9b (in line). Other income rose 42% YoY to INR4.4b (14% above est.; PQ: INR3.5b | PY: INR3.1b), driven by higher fee and dividend income, which led to the earnings beat.
* Opex grew 13% YoY to INR10.4b (in line) and the cost-income ratio fell ~130bp YoY to ~36.8% (PY: 38.1%). PPoP grew ~20% YoY to INR17.9b (in line). Credit costs stood at INR6.3b (in line; 2% lower than est.). Annualized credit costs stood at 1.8% (PY: 2.4% and PQ: ~1.7%).
* MMFS targets medium- to long-term AUM growth of 16-18%, with core vehicle lending expected to outpace industry growth marginally and diversification across mortgages, SME lending and leasing driving incremental growth. We model AUM CAGR of ~14% over FY26-28E.
* Management shared that it is closely monitoring stress across 282 drought-prone districts and has reduced exposure in select vulnerable locations while strengthening collections. It also highlighted that it is too early to assess the impact of drought in Maharashtra, given the half-yearly tractor repayment cycle aligned with the Rabi and Kharif seasons. MMFS expects credit costs to remain within 1.3-1.7%, with GS2/GS3 and credit costs remaining broadly stable in 3Q/4Q, assuming stable macroeconomic conditions.
* MMFS’ portfolio performance remains healthy, supported by disciplined underwriting, granular risk monitoring, and stable CE. Strong early bucket collections, healthy recovery trends, and multi-year low 30+ DPD levels indicate that underlying asset quality remains resilient, despite seasonally weak trends in 1H of the fiscal year.
* Management overlay of ~INR8.5b created in 2HFY26 provides a buffer against unforeseen risks, underpinning its ~1.3-1.7% credit cost guidance. We keep our FY27/FY28 EPS estimates broadly unchanged. We estimate AUM/PAT CAGR of ~14%/18% over FY26-28 and RoA/RoE of 2.2%/13.5% in FY28. We reiterate our BUY rating with a TP of INR375 (based on 1.6x Sep’28E BV).
Business assets grow ~15% YoY; disbursements rise ~22% YoY
* Business assets stood at ~INR1.46t, up ~15% YoY and ~6.6% QoQ. 2Q disbursements stood at ~INR165b, up ~22% YoY and 6% QoQ.
* Tractor disbursements grew 13% YoY, while SME disbursements rose 13% YoY. PV disbursements grew ~28% YoY. Pre-owned vehicle disbursements increased by 15% YoY.
* We expect MMFS to deliver an AUM CAGR of ~14% over FY26-28E.
Asset quality improves; Stage 3 stable and Stage 2 down 17bp QoQ
* GS3 was declined only ~3bp QoQ to 3.42%, while NS3 rose ~3bp QoQ to 1.51%. Stage 3 PCR declined 150bp QoQ to 56.6%.
* Stage 2 declined ~17bp QoQ to ~4.7%. This resulted in 30+dpd declining ~20bp QoQ to ~8.1%. Stage 2 PCR was stable QoQ at 7.8%.
* Collection efficiency in 2QFY27 stood at ~97% (PY: 96%). Write-offs (loan losses) stood at ~INR5.1b (1.6% of TTM EAD). Net slippages into Stage 3 stood at INR7.7b (PY: INR7.2b). We model credit costs (as a % of average assets) of ~1.6% each in FY27E/FY28E.
Valuation and view
* MMFS reported a steady quarter, supported by healthy disbursement and AUM growth. Asset quality improved in 1H, with credit costs remaining contained despite weak monsoons, El Niño concerns and elevated crude prices. NIM declined due to higher liquidity buffers and seasonal trade advances, with management expecting an improvement in NIM in the next quarter.
* MMFS currently trades at 1.4x FY28E P/BV. With a projected AUM/PAT CAGR of ~14%/18% over FY26-28 and RoA/RoE of 2.2%/13.5% in FY28, we reiterate our BUY rating with a TP of INR375 (based on 1.6x Sep’28E BV).
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