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Healthy top-line growth, improved operating efficiency: Mahindra and Mahindra Financial Services announced that during Q3FY24 its net interest income increased by 8.1% QoQ/18% YoY to Rs 2,302 Cr. The growth in top-line was mainly led by healthy growth in interest income (7% QoQ/23.4% YoY), however, it was partially offset by rise in interest cost by 5.5% QoQ/30.9 YoY. Pre-provision operating profit growth remained healthy at 14.3% QoQ/9.7% YoY which was mainly due to decline in provisions and various steps taken by the company to control costs.

Growth in AuM led by auto/UV finance: The company saw an uptick in the AuM during the quarter by 3.5% QoQ/25.5% YoY to Rs 97,048 Cr. The growth in AuM was primarily led by auto/UV finance and commercial vehicles. The company aims to grow its used vehicles finance segment which increased by 31.5% YoY, however, declined by 5.1% QoQ.

Uptick in disbursement growth: Disbursement during the quarter increased by 15.9% QoQ/6.7% YoY to Rs 15,436 Cr which was led by auto/UV finance by 17.4% QoQ/20.8% YoY. Disbursements in tractor finance declined by 17.6% YoY due to industry headwinds, however, the company saw increase in disbursement on sequential basis by 31% QoQ due to its core expertise and penetration in tier 2/3 cities. Going ahead, the company expects disbursements to continue in Q4FY24 in the auto/UV finance and commercial finance segments.

Margins improved sequentially: Net interest margin during the quarter was 6.8% improving sequentially by 30bps, however, declined on YoY basis by 60bps. The sequential improvement of NIMs was mainly due to stabilizing cost of borrowings on QoQ basis by 20bps while yields on advances increased by 30bps QoQ as the company managed to pass on the incremental increase in cost of borrowings to its customers. Net spread after tax increased by 120bps QoQ to 2.1%. Going ahead, the management expects net interest margin to remain at current level as the cost of borrowings are expected to stabilize while the company looks to pass on the incremental costs to its customers

Improvement in asset quality: The company reported improvement in its asset quality as gross and net stage 3 assets declined by 190bps/100bps YoY. Collection efficiency remained stable 95%, however, declined by 100bps QoQ. The company declined its provisions and write-offs by 46.3% QoQ. Provisions coverage ratio increased by 150bps QoQ/370bps YoY to 62.7% as the company has been updating its ECL model to accommodate significant macro-economic prospects.

Valuation and Outlook: We remain positive on M&M Financial Services as the company has seen healthy growth in AuM which is led by increasing demand for auto/UV finance and commercial vehicles. The company has been diversifying its vehicle finance book by investing in used vehicle finance and engaging into strategic partnership with online players. Margin improved marginally on sequential basis which is expected to improve going forward as the cost of borrowings stabilizes. We expect revenue/NII/PAT to increase by 21.6%/12.8%/10.3% CAGR over FY23-26E. We maintain Buy on the company while maintaining our target price to Rs 336, valuing the company at 1.6x of its FY26E Adj. BV.

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