Mahindra Finance Stock Research Report

Mahindra Finance, 28.0% upside

October 19, 2024

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Mahindra Finance Stock Research Report

We upgrade MMFS to BUY with our revised Sep-25E TP of Rs360 (implying FY26E P/BV of 2x; up from Rs280 earlier), as we see the inflection point for MMFS in terms of growth, asset quality, and profitability to be around the corner. As the company’s Mission 2025 nears its finishing line, it has been a case of ‘glass half full’.
With Q2FY25 business updates already lowering expectations on growth and the asset quality front, we believe the negativities around growth, asset quality, and profitability are already priced in with MMFS shares down 17% QTD Q3FY25 (vs NIFTY down ~4% and NIFTY Midcap down 3%). Notwithstanding some setbacks caused by the confluence of internal and external factors, we see the management’s medium-to-long term strategy to deliver diversified and profitable growth to be gradually progressing on the right track.
Overall, beyond the gradual expansion toward 2.2% in the near term, beginning of the rate-cut cycle, rebound in tractor sales, seasonal improvement in asset quality, absence of MFI and unsecured PL exposure, and the palatable valuation at FY26E P/B of 1.6x make a strong BUY case for MMFS.

Gradual progress on long-term strategy; near term green shoots visible

MMFS’s strategy to diversify into Universal Mortgages and MSME (with greater focus on Micro and Small) is a step in the right direction as this will cover the majority of TAM, help cross sell/upsell, and will de-risk the book providing stability and reducing seasonality.
It already has a strong parentage and AAA rating, and is now enhancing the talent pool by hiring the right experience and skill from the industry and partnering with the right partners (Banks/NBFCs) to target specific customer segments. With all the steps taken in the recent quarters and the strategic direction taken, RoA of ~2.2% looks realistically achievable in the next 4-8 quarters with ~40-50bps revenue yield improvement on account of increased fee income (cross-selling, loan related and co-lending), 8-10bps improved in Cost of Funds driven by active treasury management and gradual improvement in opex (likely to be sticky in the near term) and credit costs. While this strategy puts the company on the right track for the long term, in the near term, we see a number of tailwinds including rate cut, revival in rural/agri demand, and tractor sales.

Mission 2025 progress: Glass half-full; internal deficiencies addressed

MMFS exceeded its Mission 2025 asset quality targets and is likely to nearly deliver on its AuM growth goal; however, MMFS will fall short of its interest margins, operating expenses, and RoA targets. The misses were an outcome of some internal issues and fast-changing external factors such as: Internal issues – i) The Hazaribagh collection issue leading to RBI action in Sep-22; ii) Fraud to the extent of Rs1.5bn in Aizawl branch detected in Apr-24; iii) Lack of talent pool and expertise in non-vehicle lending segments; External issues: ii) Steep interest rate increase leading to 250bps increase in repo rate through Apr-22 to Feb-23; ii) RBI’s risk weight increase on bank’s lending to NBFCs in Nov-23.
Over the course of time, the company has addressed internal deficiencies by tightening its compliance and audit processes further and adding non-vehicle talent pool from outside. The external headwinds have subsided and on the interest rate front we see the beginning of interest rate cycle reversal soon.

Challenges priced-in; upgrade to BUY with SEP-25E TP of Rs360

Amid the miss on various parameters of the Strategy 2025 targets, MMFS shares have materially underperformed the broader market and its peers since Sep-22 (when Hazaribagh collection-related issue led to RBI action), and in Q3FY25 so far, MMFS’s share price is down 17% (vs NIFTY50 down ~4% and NIFTY Midcap100 down ~3%) on the back of weaker Q2FY25 business updates.
MMFS shares are currently trading on FY26E P/B of 1.6x and following this period of underperformance, the misses of the past and near-term challenges are already in the price. We have adjusted our estimates to reflect the progress in the year so far and strategic actions-led impact, leading to FY25E, FY26E, and FY27E EPS changing by -6%, +7% and +11%, respectively.
We upgrade the stock to BUY with our revised Sep-25E TP of Rs360 (implied FY26E P/BV: 2x) as we see near term green shoots along with the medium-to-long term strategic progress to support the re-rating of MMFS shares.