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MMFS reported a good performance in Q3FY24, with RoA of 2.1%, driven by a gradual improvement in asset yields, sharp reduction in credit cost (1.4% of business assets vs 2.8% in Q2FY24), and sustained improvement in asset quality (GS3/NS3 for Q3 at 3.97%/1.52%; for Q2 at 4.29%/1.71%). Improved asset quality-led lowering of credit cost appears to be an outcome of some structural improvement owing to Company’s better underwriting and collections along with macro tailwinds benefiting the lenders. The management sounded reasonably confident about most targets of “Mission 2025”, except the 2.5% RoA. In our view, MMFS’s strong Q3 performance signals a sustained improvement in profitability over coming quarters; however, it is unlikely that FY25E RoA will hit 2%. To reflect the Q3 performance, we have changed our FY24-26 estimates that leads to ~23% EPS increase for FY24E and ~4-6% for FY25E-26E. We reiterate our REDUCE rating on the stock, with Dec-24E TP of Rs280/share (FY25E P/BV: 1.8x; increased from Rs240 earlier).

Sharp reduction in credit cost and improved asset quality impress in Q3

MMFS reported a good performance in Q3, with the RoA hitting above 2%, driven by NIM expanding by 30bps QoQ to 6.8% and credit cost nearly halving QoQ to Rs3.28bn (1.4% from 2.8% in Q2). The sharp improvement in credit cost was helped by sustained gradual improvement in asset quality, with GS3/NS3 at 3.97%/1.52% (vs 4.29%/1.71% in Q2 and 5.93%/2.52% in Q3FY23) and a change in ECL model resulting in Rs0.86bn lowering of provisions. Collections efficiency remained broadly stable for the quarter, with a rebound in Dec-23 from some festive season slipping in Oct-Nov ’23. For Q3FY24, overall disbursements grew ~16% QoQ/7% YoY to Rs154.4bn and the business asset grew 26% QoQ to Rs970.5bn.

Despite gradual progress, “Mission 2025” profitability remains a tough ask

MMFS’s multipronged strategy to achieve ~2.5% RoA by FY25 seems to be gradually progressing; however, sustainability of performance is key to achieve such targets. MMFS has been shifting its focus towards acquiring prime customers and reducing NTC and sub-prime customers, with a view to lowering its opex and bringing credit cost to the desirable range of 1.5-1.7% by Mar-24. This strategy will keep the Opex sticky in the near-to-medium term on account of investment in technology, people, and network. The management firmly believes the strategy will pay off in future and that the company is well on track to deliver on its FY25 targets.

We change estimates to reflect Q3 developments; reiterate REDUCE

MMFS’s pleasing Q3 performance endorses the management’s “Mission 2025” plan; however, sustainability remains key for MMFS. In our view, Management’s vision of future outlook based on improvement in NII led by asset yields, playing out of the operating leverage, and improvement in credit cost will still fall short of delivering RoA above 2% on a sustainable basis. To account for the Q3FY24 developments, we have adjusted our FY24-26E asset growth and credit cost downward that leads to a ~23% increase in FY24E EPS and ~4-6% increase in FY25E-26E EPS. We reiterate our REDUCE rating on the stock, with our revised Dec-24E TP of Rs280/share (FY25E P/BV: 1.8x; increased from Rs240 earlier).

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