M&M Finance Q2 Results: Profit Falls 47% On Higher Provisions

Mahindra & Mahindra Financial Services Ltd.'s second quarter profit declined, missing analysts' estimates.

The company's standalone net profit fell 47.5% year-on-year to Rs 235.18 crore for the quarter ended September, according to an exchange filing. Analysts polled by Bloomberg estimated a standalone net profit of Rs 483.1 crore.

The bottom line was weighed down by a 14% spike in total provisions set aside for stage 1, stage 2 and stage 3 assets during the quarter. As on Sept. 30, total provisions stood at Rs 3,775 crore, as compared with Rs 3,295 crore a year ago.

In an analyst call after the results, the management said the dip in profit was due to temporary provisions on the back of gross stage 3. The company is taking a cautious look at growth and if the interest rates remain elevated, it may see some drag in the market.

Despite stabilising stage 3, this higher charge in profit and loss has come in due to temporary pressure in this quarter, according to Ramesh Iyer, managing director of M&M Finance.

Factors like markets in villages, monsoon and even postponement of cash flow set in, which are temporary in nature, he said. Further, this emergence in the tractor portfolio has caused additional provision.

The company's total income rose 24.2% year-on-year to Rs 3,240.5 crore for the July-September quarter.

M&M Finance's loan book, or assets under management grew 27% year-on-year to Rs 93,723 crore.

The management is confident of having the asset growth in the ballpark of 20% upwards level.

The lender's expenses on impairment of financial instruments jumped over three times year-on-year to Rs 627 crore during the quarter, which also weighed on net profit.

Its disbursements rose 13% YoY to Rs 13,315 crore in the second quarter.

The net interest margin compressed 30 basis points quarter-on-quarter to 6.5%. This was due to changes in portfolio mix and increased interest costs.

Credit costs rose 20 bps year-on-year to 2.3% for the first half of fiscal 2024. The company has targeted for credit costs to be in the range of 1.5-1.7%.

The management said that even though it expected borrowing costs to come down, it didn't and that's where the challenge came from.

"We expect that the NIM could inch up to 6.8% by March," the management said. It expects to keep its aim of NIM at 7%.

"NIMs are expected to go up and we expect credit cost would settle down," it said. A mix of customer and product mix change could help the company.

On credit costs, the management guided towards having them at 1.5–1.7%.

M&M Financial Services' gross stage-3 non-performing assets were flat at 4.3% as of Sept. 30. But the gross stage-2 NPA fell by 7 bps to 5.7% from the previous quarter.

Provision coverage on stage 3 assets improved to 61.2%, as against 60.1% in the previous quarter.

The management has also retained guidance of 23–24% compound annual growth rate in the analyst call. It decided to go slow on institutional lending as the market conditions had some differential behaviour.

The management plans to open new branches in the next six months and the overall disbursements won't be impacted if they did not open new ones in this quarter.

The board of directors approved the increase in limit of raising funds through issue of non-convertible debentures and subordinated debt. Under the new limits, the maximum funds that can be raised via secured and unsecured NCDs are at Rs 55,000 crore and Rs 5,000 crore, respectively. The lender can also raise funds up to Rs 5,000 crore via subordinated debt.

The board has also approved increase in limit for issuance of commercial papers from the existing outstanding limit of Rs 10,000 crore to Rs 15,000 crore.