After a few rocky quarters, Mahindra & Mahindra Financial Services (M&M Finance) is looking to turn around its fortunes. No wonder, M&M group CEO and MD Anish Shah seems to be quite pleased with its performance.
Recently, he told analysts that the financial arm has performed outstandingly well, posting robust financials for FY24. “Credit losses are well within the range that had been promised for the quarter as well as for the year. So, overall, it has been a very strong performance in Mahindra Finance,” Shah said.
The numbers justify his bullishness. M&M Finance’s loan book has grown by 24% year-on-year to Rs 1.02 trillion as on FY24 end. That too, at a time when interest rates were inching upwards. It also cut back growth in certain segments which resulted in the consolidated gross-stage 3 (GS-3) asset ratio, or gross bad loan ratio, improving to 3.4% as on March 2024, from 4.5% in FY23 — much better than the targeted 4%.
However, Shah believes that the NBFC is still only halfway through the turnaround stage.
A volatile past
The vehicle financing firm has faced tough times as well. In the first quarter of FY22, its gross bad loan ratio more than doubled to 15.5%, from 7.4% in the first quarter of FY20, due to the Covid crisis. During the same period, it also reported a net loss of Rs 1,529 crore, against a net profit of Rs 684 crore.
With rising non-performing assets, the NBFC focused efforts on recovery. But within six months, in September 2022, it faced the wrath of the Reserve Bank of India (RBI) due to high handedness of its external recovery agents.
The banking regulator banned the NBFC from undertaking loan recovery or repossession activity through outsourcing arrangements after a 27-year-old pregnant woman was crushed to death under the wheels of a tractor, forcibly being driven away by an external recovery agent. However, the NBFC sensitised recovery agents, and in January 2023, the RBI lifted the restrictions.
In the last quarter of FY24, the NBFC made a Rs 136-crore provision for a fraud in Mizoram owing to a collusion between its employees and external parties.
Predictability required
Abhijit Tibrewal, research analyst at Motilal Oswal Institutional Equities, said while incidents like the recovery mishap and Mizoram fraud are unlikely to happen again in the near to medium term, the NBFC in the past has disappointed on the asset quality.
“Sometimes the reasons have been erratic monsoon, sometimes low collections or tractor portfolio not behaving well. So, these kept happening, especially in H1 of financial years. Of course, in H2, they did bounce back,” he said.
Tibrewal added that when the company is talking about predictability, it is talking about being consistent through the year. “So, more predictability in business and less surprises is what we are keenly watching.”
Brokerage house Sharekhan shared similar views. It said sustained earnings progression and execution by M&M Finance would be monitored closely to build confidence among investors.
“The company is focusing on improving the product mix, resulting in better yields, higher fee income and a lower credit cost to support earnings. However, growth moderation and higher cost of funds may pose risks to earnings in FY25 (estimates),” it said.
Global brokerage Jefferies said it expects M&M Financial’s loan growth to moderate to 18% in FY25 from 24% in the previous fiscal, and that the spread will remain range bound in FY25. “With write-offs underpinning credit costs, lower write-off is the key to higher RoA, in our view,” it said.
Management optimistic
Speaking to FE, newly-appointed MD of M&M Finance Raul Rebello acknowledged that the NBFC has had a slightly volatile performance in the past. “As a leading NBFC, we need to demonstrate very stable asset quality and risk outcomes, and on that front, whether it was Covid-19 or before that, we used to be quite volatile,” he said.
Over the last two years, the company has invested in several control functions. They have hired new chief risk officer, chief compliance officer, new heads of underwriting, collections and analytics verticals. “We are investing a lot to make sure that volatility is significantly addressed,” he added. Rebello is keen on expanding the NBFC’s market share in wheels business, diversifying assets and achieving return on assets of 2.5%. “Predictability” over business outcome, accordingly, would remain the buzzword for the new MD going ahead.