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Disbursements to pick up; asset quality trend weak

Q2 disbursement growth was muted due to weakness in the CV portfolio; expect disbursements to pick up in H2 with a strong uptick in tractor and PV volumes. AUM grew 13% YoY to Rs 1,272.5 bn; we build 15% for FY26E. Expect spread to improve aided by a favourable mix, boost in fee income and lower CoF. Opex costs to be elevated as the company invests in business transformation. Asset quality trend continues to be weak; we remain watchful and build higher credit cost (1.9% for FY26). We value the standalone business of MMFS at 1.3x Sep-27E P/ABV. Our SOTP ascribes a valuation of Rs 284 for the standalone business and Rs 16 for subsidiaries, with a 25% Holding Co. discount, to arrive at a TP of Rs 300. While disbursement run-rate is likely to improve, weak asset quality trends weigh on profitability. Maintain HOLD.

* Expect disbursements to pick up in H2:

While Q2 disbursements were muted at Rs 135.1 bn (+3% YoY), company is seeing a strong a uptick in tractor (+41% YoY) and SME segment (+12% YoY). Commentary highlighted strong volume growth in the PV segment post GST rationalisation in Sep-25 and expects the trend to continue in H2, resulting in better volumes. Disbursements in the used vehicle segment grew 4% YoY while CV & CE disbursements saw a de-growth of 13% YoY, in-line with the industry-wide slowdown in the sector. Consequently, AUM grew 13% YoY/ 4% QoQ to Rs 1,272.5 bn. The share of M&M assets as a part of AUM was maintained at 43% (in the range of 40-45%). Strong growth in PV volumes, positive monsoon and recovery in rural demand for tractors is likely to offset the de-growth in the CV portfolio in FY26. We build an AUM growth of 15%/ 14% in FY26/ FY27E.

* Spreads improving aided by favorable mix and lower CoF:

Reported spread improved to 7.0% in Q2FY26 (vs. 6.7% in Q1FY26) driven by a 30 bps QoQ improvement in CoF. Company expects to maintain spread in the range of 6.5%- 6.7% in FY26, supported by a rising share of high-yielding segments (Used Vehicle and tractor) in the mix. Fee income has seen a steady growth to 1.4% of average assets (vs. 1.1% in Q2FY25) led by higher dividend income from MIBL and company continues to focus on the same (co-branded credit cards, Fast Tag tie-ups, insurance distribution/ TPAP license). We expect spread to improve in FY26E supported by a favorable mix and lower CoF. Opex continues to be elevated, (Opex/AUM ratio at 3.0% in 2Q) as the company continues to strengthen collections.

* Watchful of asset quality trends:

Gross Stage 3/Net Stage 3 ratio deteriorated to 3.94%/ 1.89% vs. 3.85%/ 1.91% in Q1FY26. Commentary highlighted seasonal weakness in the quarter; however GS2+ GS3 ratio was largely flat QoQ at 9.72% (vs. 9.7% in Q1FY26). Company expects asset quality ratios to improve in subsequent quarters and has guided for a credit cost of 1.7% for FY26 (vs. 2.0% for H1FY26). Collection efficiency trend improved to 96% in Q2 (vs. 95% in Q1FY26) and PCR stood at 53%. We continue to be watchful of asset quality and build a higher credit cost of 1.9% for FY26.

Q2FY26 Concall Highlights

Growth

* Business assets of the company primarily comprised of the PV segment with a 41% share in H1FY26, followed by CV & CE at 21%, pre-owned vehicles at 12%, tractors at 11% and SME at 5%. M&M assets contribute 43% of the total.

* Overall disbursements grew by 3% YoY to Rs135.1bn in Q2FY26, driven by strong growth in the Tractor (41% YoY) and SME (12% YoY) segments while CV & CE and 3-Wheeler segments saw a decline of 13% and 22% YoY respectively

* Tractor segment saw a strong growth supported by a positive monsoon and improved collections

* Festive season impact was not visible in Q2; however, the wheels segment is anticipated to see improved momentum in H2 driven by healthy volumes

* Demand for used vehicle segment is expected to face some impact from new vehicle price cuts following GST reduction. Howver, volume growth is expected to offset price reductions with customers increasingly shifting towards premium products

* Management expects to achieve a disbursement growth of 15% CAGR over the medium term

Operating profitability

* The pre-owned vehicle business remains ROA accretive benefiting from a robust existing customer base

* Total income during the quarter includes Rs540mn of dividend income from MIBL (vs. Rs150mn in Q2FY25)

* Floating-rate borrowings account for 41% of total borrowings. While the effect of MCLR is yet to be captured, the EBLR adjustments were already factored in the reported CoF

* The company is leveraging on short-term borrowings like CP to raise funds, contributing to a reduction in CoF

Asset quality

* Management anticipates credit cost to remain within the annual guidance of 1.7%

* GS2 and GS3 are likely to remain below 10%, with further improvement anticipated by Q4

* ARC transaction undertaken in MRHFL resulted in a decline in GS3 / NS3 to 2.9% / 1.0% vs. 9.1% / 5.9% in Q1FY25

* Collection efficiency improved from 95% in Q1FY26 to 96% in Q2FY26

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