Mahindra Finance Q2 Review - Weak Operating Performance Overshadowing Robust Asset Growth: Dolat Capital

Dolat Capital Report

Mahindra and Mahindra Financial Services Ltd. reported profit after tax of Rs 2.4 billion (down 33% QoQ; -55% YoY) missing both consensus (Bloomberg) and our estimate by 51%. The miss is attributable to-

1. contracting margin (net interest margin down 50 basis points QoQ) and

2. higher than anticipated credit cost of 2.8% (our estimate: 1.8%).

On NIM, Mahindra Finance had anticipated a decline of 20-30 basis points in cost of funds that did not play out. A higher credit cost was attributed to temporary slippages with majority in the tractor segment that are set to reverse in H2.

Guidance is for improving NIM trajectory and credit cost settling at 1.5-1.7% in FY24.

We view the risk reward is turning favorable with growth returning (FY23 / H1 FY24 disbursements up 80% / 20% YoY respectively) and asset quality fears abating (gross stage-3% stable QoQ / gross stage-2% improving 70 bps QoQ).

However, addressing the profitability gap will be key for achieving 2.5% return on asset guidance and turning constructive on Mahindra Finance outlook.

We cut our earnings per share estimates by 18-29% for FY24-FY25 on account of weak margin and higher credit cost. Our revised target price stands at Rs 300 (March 2025).

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