Shares of vehicle financing focused non-banking financing company (NBFC) Mahindra & Mahindra Financial Services (M&M Finance) have been trading in the red this week after it released its Q2FY24 results post market hours on Friday, which were below analysts expectation.
M&M Finance’s Q2 net profit fell 48% year-on-year (YoY) to Rs 235 crore, sharply lower than a Bloomberg estimate of RS 483 crore, primarily due to higher credit cost and moderation in margins. The NBFC’s shares were trading at Rs 277 a piece on Friday and tanked 12% on Monday, and ended trading 0.1% lower today at Rs 245 per share on the Bombay Stock Exchange (BSE).
Brokerage house Motilal Oswal said the NBFC’s annualised credit costs of 2.8% in Q2FY24 was higher than expected, and included Rs 350 crore of write-offs. It said this is the second consecutive quarter where M&M Finance has reported elevated credit cost, despite minor improvements in asset quality, and that such repeated volatility may affect investors confidence in its “transformation journey”.
The NBFC had earlier released its “Mission 2025” wherein it said it will target below 6% gross stage-3 or bad loan ratio, two-fold rise in its assets under management, and 6.5% net interest margin (NIM). The NBFC has already achieved its targets on gross bad loan ratio, which stood at 4.29% as of September end, and registered 1.44 times growth in its AUM in H1FY24, but its NIM were nearly 100 basis points (bps) below the target of 7.5%, at 6.5% during Q2FY24.
Motilal Oswal said a combination of factors, such as loan yields falling by 35 bps sequentially and cost of funds rising 10 bps led to a quarter-on-quarter (QoQ) moderation of 45 bps in the NBFC’s NIM. The NBFC has attributed lower yield to a rising proportion of PrimeX customers, stronger growth in lower yielding utility vehicles and no interest rate hike on incremental lending.
However, H2FY24 looks better for M&M Finance as the NBFC’s management has guided that a product mix change–with higher mix of pre-owned vehicles and tractors–and interest rate hike on incremental disbursements, should lead to a gradual expansion in yields.
“We estimate NIM to moderate to 7.3% in FY24 vs 8.3% in FY23 and then expand to 7.4% and 7.5% in FY25 and FY26, respectively. We expect asset quality improvement to sustain and model credit costs of 1.1%/0.9% in 3Q/4QFY24, which will translate into ~1.8% credit costs in FY24,” the brokerage said.
Speaking to FE, Vice-Chairman of M&M Finance confirmed that the NBFC will be able to post NIM the region of 6.7%-6.8% by raising interest rate on incremental loans and change in product mix. Credit cost, meanwhile, will reduce to 1.5%-1.7% by end of current fiscal, which should reduce the gross bad loan ratio to 3.5%-3.7% range, he said.
Foreign brokerage CLSA, meanwhile, said in a note that it “genuinely believes” that management is making underwriting changes for the better, and hence have not downgraded the stock despite two poor quarters. Further, in the near term, strong festive demand and seasonal improvement in asset quality will be upside triggers for the stock.
“Accordingly, we reduce our residual income-based target from Rs 360 to Rs 330 (1.9x Sep ’25 PB). Maintain BUY. Over the next six months, key upside triggers would be strong festival demand and seasonal improvement in asset quality,” CLSA said.
Emkay Global Financial Services, however, is not convinced by the management commentary about a better H2. It said M&M Finance’s muted Q2 performance dashes hopes of seasonal fluctuations decreasing for its business. The management’s assurance on performance improvements ahead—in terms of higher asset yields, improving operating expenditure and lower credit cost—, it said “is more of a pipedream and has lower visibility.”
The brokerage has downgraded M&M Finance’s shares rating to “SELL” with revised target price of Rs 235 per share, down 4% from the current market price. On a year-to-date (YTD) basis, M&M Finance’s shares are up 4.5%, while on a 52-week basis they are up 21%.