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Needs to deliver incremental RoA improvement

In-line performance excluding fraud provisioning

MMFS delivered 2-3% beat on NII/PPOP on the back of a larger 30 bps qoq NIM expansion. PAT was 8% lower than our estimate due to Rs1.36bn fraud provisions, without which the credit cost would have been 80 bps versus the expectation 100 bps. The healthy AUM growth of 5.7% qoq/24% yoy in the quarter was driven by moderate 11% yoy growth in disbursements. The growth continues to be driven by the product segments of PV/UV, Used Vehicles, low-ticket SME and LAP. This product mix shift, full-quarter benefit of much lower interest-free trade advances and stable incremental funding cost drove the sequential margin expansion. Ex-fraud the credit cost was lower due to absolute 4-5% reduction in Stage 2&3 combined gross of the write-off of Rs6bn (continues to be elevated). Collection Efficiency was at 98% v/s 95% in Q3 FY24. ECL coverage level was maintained across loan buckets. For the full-year, MMFS delivered credit cost of 1.6% (excluding fraud) which was within guided range of 1.5-1.7%.

Mizoram branch fraud likely an isolated incident

Management emphasized that Aizawl branch fraud was an extreme case of collusion involving 20+ employees, 5 vehicle dealerships and even the bank employees. About 2887 loan accounts have been identified as potentially fraudulent in nature and the company has made 100% provisions on their loan outstanding of Rs1.36bn. Checks conducted in all the other branches across India did not detect similar fraud. With the law enforcement agencies having initiated actions, some recoveries could accrue over time. The company is now focused on further strengthening controls and full proofing its systems/processes. Second-level centralized pre-disbursements checks have been implemented for 50% of branches, with the remaining 50% to be covered in coming months. MMFS will be implementing digital due diligence tools for customer onboarding. The co. has also decided to bring back the Branch Head led structure. In the recent quarters, MMFS has been investing in augmenting teams involved in Technology, Underwriting, Risk & Compliance Management and Fraud Control.

Aspiring for 18-20% AUM growth and 2.2% RoA in FY25

Even as the disbursement growth in April has been low (at 4% yoy) and that Q1 is likely to be muted due to elections, Management is hopeful to deliver 14-15% disbursements growth and 18-20% loan growth in FY25. The growth drivers are likely to be better dealership coverage, branch addition (150-180 mainly in H2) and stronger growth in used vehicle finance, low-ticket SME, LAP and other non-VF products. The co. would be striving to deliver a 2.2% RoA in the current year, which will be a 50bps improvement over FY24. Management expects RoA expansion to come from NIM improvement (20 bps), stronger fees (insurance distribution), some optimization of Opex ratio (5-10 bps) and reduction in credit cost (20-25 bps). The NIM expansion is likely to come from improvement in portfolio yield due to product mix shift and stabilization (some moderation in H2) of funding cost.

Valuation undemanding, but maintain Neutral rating

Disbursement growth, collection efficiency and write-offs would be key monitorables in the upcoming monthly updates. In April, originations growth and collection efficiency were lower. In our view, delivering the aspired 18-20% AUM growth and 2.2% RoA could be a challenging ask for MMFS considering 1) disbursement momentum in recent quarters, 2) diminishing tailwinds in Auto sector (moderation in demand and pricing growth), 3) investments planned in areas of Tech/Digital, Underwriting, Risk Control, etc. (could sustain pressure on Opex/Asset ratio), and 4) extant trends in write-offs. Valuation is reasonable at 10x PE and 1.6x PABV on FY26 estimates but rerating only possible when the road to 15% RoE become clear and certain.

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