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Await acceleration in disbursement growth

Originations growth was low in key products; PPOP performance was below expectations

MMFS delivered a PAT of Rs5.1bn in Q1 FY25 which was 16% higher than our estimate. The beat came solely from much lower-than-expected credit cost, whereas PPOP/NII were 9%/5% below our expectations. Controlled credit cost, despite deterioration in asset quality (seasonality + election/heatwave impact) and sustained write-offs (though moderated), was driven by ECL coverage decline across loans stages with PD and LGD refresh. In absolute terms, the Stage-2/Stage-3 loan assets increased by 26%/18% on sequential basis after adding back the write-offs.

NIM declined by 30-40 bps qoq on calculated basis on account of increase in funding cost and material reduction in portfolio yield. The latter was more representative of presence of significant interest write-back in Q4 FY24 and material increase in Stage 2 & 3 pool during the current quarter (impacting interest recognition). Business Assets grew 3.6% qoq/22.6% yoy in Q1 FY25, even as disbursement growth was moderate at 5% yoy. Originations were weak in key products of PV, Used Vehicle and Tractor financing.

Management continues to harbor aspirations of high-teens growth and 2.2% RoA for FY25

MMFS expects full-year disbursements growth to be much better than Q1 FY25. Share of pre-owned vehicle financing within overall disbursements is expected to increase and sustain near 20% aided by investments in teams and partnerships. The co. also plans to increase dealership coverage and branches (significant addition in H2 FY25). Growth in tractor financing is likely to revive on improved demand prospects, and growth in low-ticket SME loans is going strong on a benign base. Critical for MMFS would be improvement in demand trajectory of PVs over the coming quarters.

For margins to be a material contributor in the aspired RoA improvement, the funding cost pressure needs to stabilize, and portfolio yield needs to show a pick-up on the back of 1) product mix shift towards pre-owned vehicles financing and tractor financing, 2) manifestation of rate hikes taken over the past couple of quarters and 3) ceiling reached for affluent customer contribution within PV portfolio. Management expects credit cost in the range of 1.2-1.5% for the year, underpinned by 1) Stage 2 & 3 assets remaining stable at <10% combined, 2) write-offs remaining range-bound, and 3) further calibration of ECL coverage on gradual reduction in LGD from rolling fwd. of the ECL model.

Await improved and consistent disbursement performance

We trim estimates for FY25/26 on marginally lowering AUM growth and curtailing the NIM estimate. We now expect a CAGR of 16.5% in AUM, 21% in PPOP and 30% in PAT over FY24-26, and average RoA/RoE delivery of 2.1%/14%. No capital raise has been factored by us, even as management estimates a capital raise in H1 FY26. The stock trades at 11.5x P/E and 1.7x P/ABV on FY26 estimates (adjusted for MRHFL valuation). We continue to believe that a significant re-rating of MMFS would only happen on consistent delivery of double-digit disbursement growth.

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