Shares of Mahindra & Mahindra Financial Services Ltd (Mahindra Finance) fell 1.6% since it reported its November growth numbers last week, while the Nifty 50 index rose 1.3%. The non-banking finance company saw fresh loan disbursements of ₹5,300 crore in November, which is flat month-on-month.
Annual growth was around 16%, which is in line with the growth seen so far this year. Total assets under management (AUM), also referred to as gross trading assets, stood ₹96,600 crore in November, up 26% year-on-year.
However, monthly collection efficiency was lower, going down to 94% from 96% in November 2022. It is worth mentioning here that Diwali was in November this year and in October in 2022. “This explains the strong year-on-year growth of expenses and the slight decline in collection efficiency,” said Motilal Oswal Financial Services.
The festive period traditionally sees a surge in automotive, commercial vehicle and tractor demand, a key asset class for the company’s loan business. This is also the reason the company is likely to report relatively strong December quarter (Q3FY24) numbers.
Note that the car loan business including cars/utility vehicles, tractors, cars, commercial vehicles accounted for 95% of Mahindra Finance’s total disbursement in the half year ending September (H1FY24).
For investors, this year has been a rollercoaster ride. After touching a 52-week high of ₹346.55 in July, Mahindra Finance shares fell 21% to ₹273.25.
A major disappointment was the company’s Q2 results, in which growth and profitability missed market estimates. Net profit fell 48% year-on-year to ₹235 crores. Net interest margin (NIM) fell 30 basis points sequentially in Q2 to 6.5%. One basis point is one-hundredth of a percentage point. The more-than-expected NIM drop was led by a change in portfolio mix, rising cost of funds and lower yields.
Mahindra Finance’s asset quality, mainly represented by the gross stage-3 loans, improved steadily from Q2FY22 to Q1FY24. Gross stage-3 loans as a percentage of total loans fell sharply by double digits to 4.3% in Q2FY24. While this is a good sign, it should be noted that the metric has remained flat sequentially. Mahindra Finance expects it to fall to 3-3.5%.
For FY24, the company aims to deliver 20% growth in AUM. The credit cost guidance for FY24 stands at 1.5-1.7%. This looks difficult to achieve until high stocks are reversed, according to analysts at Nomura Financial Advisory and Securities (India). “Credit cost was 2.6% in H1FY24, and it needs to be about 0.75% in H2FY24 to reach 1.7% credit cost in FY24,” Nomura analysts wrote in a report on 5 December.
As such, investors are likely to track how the festive season fared for Mahindra Finance and look for signs of better rural demand in H2FY24. Further, the company has outlined an aggressive growth plan under its Mission 2025 strategy. Under this, the company aims to double its AUM (vs. FY22), increase NIM to 7.5% and achieve a return on assets of 2.5%.
Meanwhile, the stock has gained 14% in the past year. Many analysts remain cautious on the outlook. Nomura has a “reduce” rating on the stock. Factors that drive its rating include: underperforming profitability on a structural basis with a 5/10 year return on equity of 9%/11%, the lowest among its peers; and an expensive valuation given the company’s growth/profitability profile. Here, investors will be concerned about improvement in credit cost and better NIM.