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Broadly in-line show

MMFS’ NII and PPOP in Q3 FY24 were largely in-line with our estimates, and so was PAT after adjusting for provision benefit (Rs0.86bn) due to revision of ECL model. While the headline growth and asset quality trends were known, a larger-thanexpected margin expansion was a mild positive and continuance of elevated write-off (in the context of opening GNPLs) was a negative. Net flows into GS2 and GS3 were meaningful (after adding back the write-off), which was reflected in marginally lower collection efficiency for the quarter. Though overall disbursements growth moderated to 7% yoy, the origination activity was strong in Auto/UV, Cars, CE, and Used Vehicle financing. The material improvement in Portfolio Yield during Q3 FY24 reflected 1) conversion of interest-free trade advances into retail vehicle loans, 2) benefits from improving fee-based income and 3) marginal rate hikes taken thus far. Opex/Avg. Assets ratio remained elevated at 2.8% with sustained higher growth in non-employee cost.

AUM growth to decelerate; extent of margin recovery and credit cost reduction would be key

MMFS’ AUM growth has been coming-off as disbursement growth has been declining on an increasing base. Management expects disbursement growth to be slightly lower in FY25, which is likely to decelerate AUM growth much below the 20% mark. The lower disbursement growth is likely to be caused by lower volume growth expected for Auto/UVs/Cars, a prolonged slowness in Tractor sales, granularization of SME portfolio and calibrated disbursements of personal and consumer loans.

While incremental funding cost seems to be peaking, further margin recovery would be a function of remaining manifestation of already taken rate hikes, further rate actions and incremental growth mix from product and customer profile standpoint. The share of NTC and sub-prime customers has been coming down in originations. Given largely fixed-rate loan book and 46% of borrowings being floating, MMFS’s margin would benefit when rates soften.

With the benefit of ECL model revision which marginally lowered ECL requirement for Stage-1, MMFS would be able to achieve its credit cost guidance of 1.5-1.7% for the year. For the co. to achieve a lower credit in FY25, the pace of write-offs needs to come-off and net flow rates needs to improve. The better underwriting/behaviour of loans over the past 18-20 months and the ongoing shift in product and customer mix needs to manifest in improved collection trends. The ECL coverage requirement on Stage-3 may decline on downward revision of LGD in the annual ECL model review of next year.

Earnings have been cut further; maintain Neutral rating

We cut earnings estimates for FY24/25/26 by 2%/3%/4% mainly on lowering of growth assumptions. The achievement of 2.5% RoA is likely to remain elusive and we see 15% RoE being achieved only in FY26. Valuation at 11x PE and 1.7x P/ABV on FY26 estimates seems fair for the envisaged AUM growth/RoE delivery. Hence, we maintain Neutral rating on the stock. Key monitorables would be trends in disbursement growth and write-offs.

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