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Earnings miss due to high provisions; reported NIM up 30bp QoQ

* Mahindra & Mahindra Financial’s (MMFS) 4QFY24 PAT declined ~10% YoY to INR6.2b (15% miss). Adjusted for provisions on Mizoram fraud, PAT would have been INR7.2b (in line). FY24 PAT fell 11% YoY to INR17.6b. ? NII stood at INR18.1b (in line), up ~13% YoY. Other income rose ~30% YoY to ~INR1.6b, driven by better fee income.

* Credit costs at ~INR3.4b included provisions of ~INR1.36b related to fraud in Mizoram. Annualized credit costs stood at ~1.4% (flat QoQ).

* Core NIM (calc.) expanded ~15bp QoQ. Including non-interest income, net total income (as % of assets) expanded ~30bp QoQ to 7.1%.

* To full-proof the system against even such frauds of extreme collusion, MMFS has started accelerating process improvements, including heightened due-diligence for customer onboarding and centralized verification of customers.

* We expect MMFS to use the levers on product mix and fee income to deliver a ~25bp YoY improvement in NIM. Benefits from the ECL provision release and a decline in write-offs will also result in improvement in credit costs. We estimate a CAGR of 16%/40% in AUM/PAT over FY24-FY26, with FY26E RoA/RoE of 2.4%/17%. Retain BUY with a revised TP of INR325 (based on 1.8x FY26E BVPS).

* Key risks: a) Muted yields because of higher competitive intensity and increasing proportion of prime customers, b) benefits of credit cost decline not coming through because of higher provisioning requirement

Marginal expansion in spreads; better fee income drives NIM gain

* Yield (calc.) was flat QoQ at 14.7%, while CoF (calc.) declined ~5bp QoQ, leading to a ~5bp expansion in spreads. Reported NIM (including fee income) rose ~30bp QoQ. There was a healthy improvement in fee income (non-lumpy), which is expected to sustain.

* Borrowing costs declined ~5bp QoQ to ~7.8% and incremental CoF stood at ~8%. The management has guided that it expects the incremental CoF to remain stable at current levels over the next two quarters. We estimate NIM to expand to ~7.3%/7.4% in FY25/FY26 (vs. 7.2% in FY23).

Key takeaways from the management commentary

* Central processing center (CPC) has gone live in ~50% of the branches and will go live in the remaining branches within the next few months.

* Guides for disbursement growth of ~14-15% and AUM growth of 18-20%. The company expects 1QFY25 to be muted because of ongoing elections but expects demand sentiment to improve after elections.

* MMFS management will strive for a base-case RoA of ~2.2%. This will come from a ~25bp increase in NII and fee income, a ~10bp decline in opex and a ~25bp moderation in credit costs.

Valuation and View

* MMFS would hopefully now start demonstrating more predictability in its earnings performance. A strong liability franchise and deep moats in rural/semiurban customer segments position MMFS well to reap the rewards of the hard work that is going into evolving this franchise.

* MMFS currently trades at 1.5x FY26E P/BV. Risk-reward is favorable for a PAT CAGR of ~40% over FY24-FY26E and FY26E RoA/RoE of 2.4%/17%. Maintain BUY with a revised TP of INR325 (based on 1.8x FY26E BVPS).

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