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Earnings beat due to decrease in PCR

Mahindra Finance (MMFS) reported earnings ahead of our estimates driven by controlled opex and lower provisions which resulted in decline in PCR. On NIMs front, MMFS faced twin challenges - yield compression (upgrade to better customer segment and lower yields on leading segments) and rising CoF. Resultantly, NII growth lagged AUM growth and print was at mere 12%. However, opex to Assets was controlled and remained 10bps lower YoY to 2.7% leading to higher PPoP growth (14%). However, credit cost was lower resulting in higher PAT of Rs5,130mn as compared to our estimates (Q1FY25E: 4,068mn). Pertinently, lower provision led to fall in PCR by ~300bps. Disbursements for 1QFY25 was muted at Rs127.4bn, up 5% YoY and down 17% QoQ. Business AUM was up 23% YoY primarily due to high base of 4QFY24. RoA guidance for FY25 was maintained at 2.2%. We continue to build in AUM/PPOP/PAT CAGR at 17%/26%/37% over FY24-26E and expect RoA/RoE at 2.2%/15.7% for FY26E. Seasonally weak quarter and elections continued the deceleration of disbursement growth and we expect slowdown to continue as co. remains focused on strengthening its internal processes. We value MMFS (standalone) at 1.5x FY26E P/ABV and subsidiaries at Rs19 to arrive at our Target Price of Rs250. Maintain Sell.

NIMs impacted by lower yield and increase in CoF

Increased competitive intensity, change in product mix, seasonally weak quarter and elections led to 61bps/42bps YoY/QoQ decline in interest yield (on BS loans) to 14.3%. CoF (calc) stood at 7.8% increasing by 26bps/3bps YoY/QoQ. Reported spreads were down 50bps YoY and 20 bps QoQ to 6.6% as company moved up in terms of customer selection impacting yields. CoB continue to be high across companies and is expected to be kept around same 7.8-8%. In our view, competitive intensity may limit company’s ability to raise lending yields in its target customer segment. Opex witnessed improvement (YoY and QoQ) due to efficiency – 10bps lower YoY on average assets.

Earnings beat as provisions come in lower than expected

Loan loss provisions for 1QFY25 stood at Rs 4.5bn, down 31% QoQ asthe PCR has decreased to 59.8% from 63.2% in the last quarter (Q4FY24). This improvement is due to a positive trend in LGD over the past 42 months. Management expects the PCR to potentially decrease further. GS2/GS3 was at 6.1%/3.6% in 1QFY25 vs 5.0%/3.4% in 4QFY24 and 6.4%/4.3% in 1QFY24. GS3 is trending well below the guidance of 4.5%. PAT at Rs5.1bn, was up 45% YoY. Reported RoA for 1QFY25 stood at 1.8%.

AUM growth remains healthy, disbursement growth decelerates to mere 5% YoY

Disbursements growth decelerated to 5% YoY after registering 10%-145% YoY growth in last 8 quarters. AUM at Rs1,063bn was up 23% YoY and 4% QoQ. Disbursements YoY growth in PV, Pre-owned vehicle, CV/CE, SME was 3%,2%,11%,68%, respectively while Tractors and Others segment registered a decline by 7% and 10% respectively in 1QFY25 as Company has been making interim corrections in specific locations due to stress visible on a cross-cycle basis.

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