Shares of Mahindra & Mahindra Financial Services Ltd. dropped to their lowest in over a month Tuesday after the company said it uncovered a Rs 150-crore fraud relating to retail-vehicle loans in its branches in the Northeast. The fraud involved forgery of know-your-customer documents, resulting in embezzlement of funds from the non-banking financial company in regard to loan disbursements, according to an exchange filing.
Investigations are in the advanced stage. The company has postponed its scheduled board meeting where discussions were planned on its fourth-quarter results, dividend and borrowing-limit adjustments. The fourth-quarter earnings were supposed to be announced on Tuesday.
The up to Rs 150-crore fraud at Mahindra Finance is likely to hit its fourth quarter profit by over 20%, according to analysts at Centrum.
Here's what brokerages have said on M&M Financial Services:
Citi Research
Citi Research maintains a 'neutral' rating on the stock with a target price of Rs 315.
The fraud to shake up investors' confidence. It will be sentimentally negative for the stock.
Improving asset quality has been encouraging and closely monitored.
Earnings release has been deferred and the brokerage expects additional information related to the fraud will be disclosed in the earning call.
Risks
Citi said downside risks that could cause MMFS shares to trade below its target price include: 1) weak monsoons impacting rural consumption; 2) more aggressive competition halting market share gain for Mahindra Finance. Upside risks include better than expected margin improvement and credit cost containment
Centrum
Downgrades to 'sell', reduces target multiple to 1.5 times vs 2 times earlier; Target Price: Rs 249.
The company estimates that the financial impact of this fraud is unlikely to exceed Rs 150 crore.
Fraud involved Area Business Manager and other employees of concerned branch.
Estimated amount of Rs 150 crore is 3.7 times average company disbursements of Rs 41 crore per branch.
Large quantum suggests fraud has been going on for several months/years.
May impact earnings estimates for Q4 FY24 and FY24 by ~22% and 8.2%, respectively.
Impacts net worth by ~0.8% for FY24E.
May slowdown growth as company works on strengthening its internal processes.
Citi
Reiterates 'buy' rating, with Target Price of Rs 360, upside of 35%.
If MMFS fraud estimate of Rs 150 crore proves true, estimated quantum would be 8% of PAT of FY24, 3.7 times of FY24 disbursements/branch (Rs 40 crore), 2 times of AUM/branch (Rs 75 crore).
Likely spans a longer dated period.
Await clarity on: risk of fraud at other branches, period of operation to which fraud persist, impairment already taken on this, change in process to avoid similar concerns.
On the NSE, Mahindra Finance's stock dropped as much as 8.02% during the day to Rs 256.50 apiece, the lowest since March 20. It was trading 4.66% lower at Rs 265.90 per share, compared to a 0.29% advance in the benchmark Nifty 50 at 09:29 a.m.
The share price has risen 4.72% in the last 12 months, but declined 3.65% in the year so far. The total traded volume so far in the day stood at 91 times its 30-day average. The relative strength index was at 34.25.
Twenty out of the 39 analysts tracking the company have a 'buy' rating on the stock, 12 recommend 'hold' and seven suggest 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 16.2%.
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