Reduce M&M Financial Services Ltd For Target Rs. 255 by Centrum Broking Ltd
Soft FY25; Cautious outlook for FY26
Mahindra Finance (MMFSL) reported Q4FY25 results that were below our expectations. PAT came in below estimate, primarily due to elevated provisions. Margin compression was due to a 20bps increase in funding costs and higher leverage (owing to increased capital consumption). AUM growth stood at ~17% YoY and 3.9% QoQ. However, Disbursements growth remained muted at 1.5% YoY (down 6% QoQ) due to the prevailing macroeconomic slowdown. We expect FY26 disbursement growth to remain subdued and it will likely fall short of the mid-teen guidance over the medium term. Operating expenses are expected to remain steady. As per the management, they expect ECL provision to rise again, albeit in a gradual manner. We bake in AUM/PPOP/PAT CAGR at 13%/15%/17% over FY24-FY27E and expect RoA/RoE at 1.8%/12.7% for FY27E. We value MMFS (standalone) at 1.5x P/ABV FY27E and its subsidiaries at Rs22 to arrive at our revised target price of Rs255 (previous target: Rs263). We continue to maintain our REDUCE rating.
Lower yield offsets fall in CoF
The loan book re-pricing has seen no change. The company took a one-time expense to reset the loan origination and LMS systems during the year. Interest calibration benefits have been returned to customers. Hence,Q4FY25 has seen a drop in yields. The calculated CoF decreased by 20bps QoQ to 7.69%. Despite this, reported spreads declined by 8bps QoQ to 6.4% as the drop in yields outweighed the fall in CoF. Looking ahead, NIM is projected to settle at a lower range of 6.5- 6.7% compared to the earlier aspirational target of 7.5%. We believe that competitive pressures may limit the company's ability to further raise lending yields within its target customer segment.
Higher-than-expected credit cost leads to earnings miss
Loan loss provisions for Q4FY25 stood at Rs4,571mn, which was higher than expectations. Credit cost (calc.) was at 1.60% (PY: 1.42%; PQ: 0.03%) for Q4FY25 and 1.5% for FY25 (PY: 2.0%). The management has guided to achieve its FY26 credit cost guidance of ~1.3-1.7%. During the quarter, end losses increased to Rs4.98bn vs Rs4.44bn in Q3FY25. Additionally, GS2/GS3 ratios stood at 5.4%/3.7% vs 6.3%/3.9% in Q3FY25, indicating improvement in asset quality. As a result, PAT declined by 9% YoY to Rs5.6bn while the calculated RoA stood at 1.7%.
AUM growth remains healthy; Disbursements below par
Disbursements grew by mere 1.5% YoY (down 5.7% QoQ) in Q4FY25, registering subdued performance in FY25 with a growth of 3%. Disbursements YoY growth in PV, SME, Tractors, CV/CE and Others stood at 0.3%, 30%, 3.5%, 2.6% and 94%, respectively while Pre-owned Vehicles registered a decline of 11% YoY. However, AUM at Rs1,196bn was up 17% YoY and 3.9% QoQ primarily due to strong disbursements in previous years. Going ahead, we believe AUM growth would be impacted by poor performance on disbursement front
Concentration risks, growth challenges and inconsistent execution keep us negative
MMFSL has a significant concentration in its portfolio, with +93% of its exposure tied to the Wheels segment. This lack of diversification makes it particularly vulnerable to sectorspecific risks, especially in the current uncertain environment. Also, the company's growth trajectory is another area of concern. Despite management's guidance for high-teens AUM growth in FY26, we believe this target is ambitious given the below-par disbursement trends observed in FY25. Further, MMFSL's performance track record has been inconsistent, even in periods of sectoral tailwinds. Investors seeking exposure in Auto NBFC have better alternatives with companies that offer more diversified portfolios and a stronger track record of execution and performance. We maintain our ‘negative’ view on MMFSL.
Valuation
We bake in AUM/PPOP/PAT CAGR at 13%/15%/17% over FY24-FY27E and expect RoA/RoE at 1.8%/12.7% for FY27E. We value MMFS (standalone) at 1.5x P/ABV FY27E and its subsidiaries at Rs22/share to arrive at our revised target price of Rs255 (Previous target: Rs263). We continue to maintain our REDUCE rating.
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