Mahindra Finance Q4 Results Review - Process Enhancements To Help Recover From Fraud Setback: Motilal Oswal

Motilal Oswal Report

Mahindra and Mahindra Financial Services Ltd.’s Q4 FY24 profit after tax declined ~10% YoY to Rs 6.2 billion (15% miss). Adjusted for provisions on Mizoram fraud, PAT would have been Rs 7.2 billion (inline). FY24 PAT fell 11% YoY to Rs 17.6 billion.

Net interest income stood at Rs 18.1 billion (in line), up ~13% YoY. Other income rose ~30% YoY to ~Rs 1.6 billion, driven by better fee income.  Credit costs at ~Rs 3.4 billion included provisions of ~Rs 1.36 billion related to fraud in Mizoram. Annualized credit costs stood at ~1.4% (flat QoQ).  Core NIM (calculated) expanded ~15 bp QoQ. Including non-interest income, net total income (as % of assets) expanded ~30 bp QoQ to 7.1%. 

To full-proof the system against even such frauds of extreme collusion, Mahindra Finance has started accelerating process improvements, including heightened due-diligence for customer onboarding and centralized verification of customers.

We expect Mahindra Finance to use the levers on product mix and fee income to deliver a ~25 bp YoY improvement in NIM. Benefits from the ECL provision release and a decline in write-offs will also result in improvement in credit costs.

We estimate a CAGR of 16%/40% in assets under management/PAT over FY24-FY26, with FY26E return on asset/return on equity of 2.4%/17%.

Retain Buy with a revised target price of Rs 325 (based on 1.8 times FY26E book value per share).

Key risks:

1. Muted yields because of higher competitive intensity and increasing proportion of prime customers,

2. benefits of credit cost decline not coming through because of higher provisioning requirement.

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