Mahindra Finance - Earnest Attempt At A Credible Transformation: Motilal Oswal

Motilal Oswal Report

Mahindra and Mahindra Financial Services Ltd. has exhibited volatile operating performance and weak asset quality in the past. However, the management has undertaken various strategic initiatives, which we believe, if executed properly, could script a credible transformation of the company.

Mahindra Finance has translated the key performance indicators introduced under Mission 2025 into strategic priorities, such as expanding its presence, leveraging technology to drive operational efficiency, developing new products and making process enhancements. The management is committed to investing in new capabilities and advanced technological solutions to reduce volatility in the company’s operating performance.

In the last fiscal year, Mahindra Finance strengthened its leadership position in the tractor, Mahindra Auto and non-Mahindra financing segments with improvement in market shares. The improved rural cash-flows should support demand sentiment in FY24. The company is also increasing its penetration in the used vehicle segment.

We believe that this transformation is only half-complete. Given the change in product/ customer mix, blended net interest margin will find a new normal within the next few quarters, but the tech transformation that the company is embarking on should help Mahindra Finance improve its operating efficiency and credit costs.

Strong moats in the rural/semi-urban customer segments position Mahindra Finance well to reap the rewards of the hard work that is going into evolving this franchise.

We model a compound annual growth rate of 19%/20% in assets under management/profit after tax over FY23-FY25E, with return on asset/return on equity of 2.3%/15.4% in FY25E.

We have a 'Buy' rating on the stock with a target price of Rs 350 (premised on 2.2 times FY25E price/book value).

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