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Growth holds up; margin and rural stress warrant caution

Q2 disbursements grew 22% YoY led by broad-based growth across segments, while AUM grew 15% YoY to INR1,465.1bn. We build AUM growth of 14%/15% for FY27E/FY28E, remaining conservative amid potential rural stress and a high base in the festive season. Reported NIM moderated to 7.0% due to excess liquidity buffers and non-yielding trade advances, with rising funding costs and limited pass-through likely to keep margins under pressure. Fee income has improved through cross-selling and diversification, although the proposed insurance commission regulations pose a downside risk. Asset quality remained broadly stable QoQ, with credit costs at 1.6%; we build credit costs in line with guidance while monitoring El Nino-related risks to the rural and tractor portfolios. We marginally tweak our estimates and value the standalone business of MMFS at 1.5x Sep’28E P/ABV. Our SOTP ascribes a valuation of INR335 for the standalone business and INR19 for subsidiaries, with a 25% Holding Co. discount, to arrive at a TP of INR350. Following a 16% correction in stock price over the past month, we upgrade our rating to ‘Buy’ from ‘Accumulate’.

Expect 14% growth in FY27E:

Q2 disbursements sustained strong growth momentum at 22% YoY to INR165bn while AUM grew by 15% YoY to INR1,465.1bn. Wheels AUM grew 21% YoY and non-wheels AUM grew 52% YoY, contributing 20% to the overall lending book. Within the wheels business, growth was led by PV (+28% YoY), CV & CE (+16%) and Used CV (+15%). Management aims to grow the core wheels business slightly ahead of the industry, with diversification into SME, mortgages and other lending segments providing incremental growth. It reiterated its medium-term AUM growth aspiration of 16%-18%. Higher trade advances are expected to support festive-season disbursements in Q3; however, early trends of festive-season and unit disbursements were softer YoY, partly due to a high base of last year following GST-led pent-up demand. Further, potential El Nino-related stress and drought conditions across several districts pose risks to rural demand, particularly in the tractor segment. Accordingly, we remain conservative and build AUM growth estimates of 14%/15% for FY27/FY28E.

NIM to moderate as funding cost rises:

Reported NIM stood at 7.0% (vs. 7.3% in Q1FY27) reflecting a ~40 bps compression in yield while CoF remained largely stable. Lower yields were driven by the drag from excess liquidity and higher seasonal trade advances, which are largely non-earning. The impact on loan income is expected to ease in Q3 as trade advances convert into regular disbursements. However, CoF is expected to inch-up following the rate hike and higher refinancing costs, with limited pass-through given the predominantly fixed-rate wheels portfolio (~80% of AUM). Management expects to partly offset the impact through higher pricing on incremental disbursements, particularly in self-employed agri-segments. Management expects RoA to improve towards its medium-term target of 2.2%-2.5%. Fee income has improved through cross-selling and diversification, however the proposed insurance commission regulations could weigh on income from corporate agency and MIBL.

Watchful of asset quality trends:

Gross Stage 3/Net Stage 3 stood largely stable QoQ at 3.42%/1.51%. Collection efficiency improved QoQ at 97%. Credit cost stood at 1.6% in Q2FY27, with management retaining its guidance of 1.3%-1.7%. The company has an INR8.5bn overlay buffer against potential macro-economic disruptions and does not currently envisage any further increase. However, potential El Nino-related stress and drought conditions remain key monitorables. The company strengthened its collections in affected regions and moderated disbursements in stressed locations. While rural cash flows typically improve in H2, management highlighted that the usual seasonal decline in credit costs may be less pronounced given the already-low delinquency levels. We build in credit cost in line with guidance, while remaining watchful of rural asset quality trends.

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