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MMFS reported disappointing numbers in Q2, with the lower asset yield and higher borrowing cost causing a miss on NII; also, a spike in credit cost led to net income missing Consensus/our estimate by 48%/34%. The management sounded confident about the future outlook and believes the poor Q2 performance is a temporary derailment due to seasonal factors. But in our view, MMFS’ muted Q2 performance dashes hopes of seasonal fluctuations decreasing for its business; also, the management’s assurance on performance improvements ahead—in terms of higher asset yields, improving opex and lower credit cost—is more of a pipedream and has lower visibility. To build-in the Q2 performance, we reduce FY24-26E EPS by ~22-25% and our BVPS by ~2-6%, downgrading the stock to SELL with Sep-24E TP of Rs235/share (FY25E P/BV: 1.5x)

Mahindra Finance: Financial Snapshot (Standalone

Disappointing at present; future improvement a pipedream

MMFS’ performance was listless across all key parameters—PAT came in at Rs2.35bn (a 48% miss on Consensus and a 34% miss on Emkay estimates), which was prompted by a combination of a miss at the NII level (led by lower asset yield and higher cost of funds) and a spike of 2.78% in credit cost (~30bps higher vs Q1). Management attributed the weakness in NII and the spike in credit cost to seasonal factors and sounded confident about reversing the trends in both, NII and credit cost, led by their proactive measures and seasonal factor adjustments over the next two quarters.

Management believes the Q2 shock is a temporary blip

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 1.5-17% by Mar-24. But as things stand now, this strategy has only caused reduction in asset yields, with opex staying higher due to continued investments in tech, human resources and network, and the stronger impact of seasonal factors on credit cost leading to subpar profitability. The management firmly believes the strategy will pay off in future and that Company is well on track to deliver on its FY25 targets. It sees opex remaining higher near-term on investment in tech/infra, but credit cost seeing sharp moderation in H2, leading to FY24 credit cost ranging at 1.5-1.7%.

Better future outlook wishful thinking; Downgrade to SELL

Over the last 2-3 quarters, MMFS’ shares have been seeing a re-rating on account of expectations of reduced seasonality and a more robust business model. But the poor Q2 show materially challenges the hypothesis of reduced seasonality. Management optimism about future outlook based on improvement in NII led by asset yields, playing out of the operating leverage, and improvement in credit cost still seem an unrealistic goal. Against such a backdrop, the 2.5% RoA story remains a tough ask. To account for the Q2FY24 developments, we have adjusted our FY24-26 estimates that results in ~22-25% fall in EPS and a 2-6% drop in BVPS. We downgrade the stock to SELL, with Sep-24E TP of Rs235/share (implied FY25 P/BV: 1.5x) resulting in 15% downside from current levels.

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