M&M Financial Services is preparing for a rise in funding costs even as it reports strong profit growth, signalling a potential squeeze on margins in the coming quarters, as per its post-earning analyst call. During its Q2 earnings call, the NBFC said it does not expect borrowing costs to decline in the near term and sees its cost of funds moving upwards as the interest-rate cycle plays out. Most of its existing loans carry fixed interest rates, while incremental assets are expected to be originated at higher rates.
M&M Financial Services reported standalone net profit of Rs 882 crore in Q2, up 54.8% from Rs 569 crore a year earlier. Net interest income increased 13.3% year on year to Rs 2,391 crore. Operating profit, however, rose just 2% to Rs 1,791 crore from Rs 1,756 crore.
Management has cautioned that the current pace of profit growth may not be sustainable, as the sharp increase in net profit was driven substantially by lower credit costs rather than a comparable acceleration in operating profit.
Impairments rose 10.5% quarter on quarter to Rs 630 crore from Rs 570 crore. Credit costs increased to 1.6% from 1.5% in the preceding quarter, even as gross Stage 2 and Stage 3 assets improved to 8.1% from 8.3%.
M&M Financial Services said it remains on track to diversify across multiple segments, viewing this as a key source of incremental growth. Its assets under management rose 15% year on year to Rs 1.46 lakh crore, while disbursements increased 22% to Rs 16,499 crore. Its cost-to-income ratio declined to 37%, while fee-based income improved by 60 basis points.
Management said it would not chase growth in the vehicle-financing segment, signalling a focus on expanding other businesses rather than relying solely on its traditional lending franchise.
The NBFC is monitoring drought-affected areas and intensifying collection activity in those regions. Rural stress could affect repayment behaviour and asset quality if farm cash flows weaken.
The company is also taking a wait-and-watch approach to the proposed insurance distribution reforms, while assessing the implications for its business.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.