Mahindra Finance’s higher provisions, shrinking margins keep analysts concerned

Mahindra Finance Q1 Results: Going ahead, the company shall focus on maintaining the market leadership in core segments (commercial vehicle financing), while accelerating growth in SME, leasing and personal loans

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Mahindra & Mahindra Financial Services reported a net interest margin (NIM) of 6.8 percent for the quarter ended June 2023, which is much lower than its 7.5 percent target for Mission 2025. Following this, brokerages have cut the EPS (earnings per share) estimates for the stock.

The impact on margins has come on the back of a shift to better-grade customers, reluctance to pass rate hikes and the fixed-rate nature of the loan book, noted Kotak Institutional Equities.

At 12:15pm, the stock was quoting at Rs 297.25 on the NSE, lower by 0.8 percent from its previous close. The stock is up 23 percent year-to-date.

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However, the company is in a course correction mode to achieve its ‘Mission 2025’ target margins. Going ahead, it shall focus on maintaining the market leadership in core segments (commercial vehicle financing), while accelerating growth in SME, leasing and personal loans. It has also raised the rates marginally in select cohorts in Q1, applicable for new borrowers.

KIE has cut EPS estimates for the stock for FY24 by 6 percent. “Challenges on margin will likely lead to a 12 percent RoE (return on equity) for FY2024, before increasing to 14-15 percent over the next two years,” it said. The firm has a ‘reduce’ rating on the stock with target at Rs 330.

Macquarie too has a ‘neutral’ rating on the stock with a target price of Rs 215 per share, citing the decline in NIM as a worry.

Morgan Stanley has assigned an ‘equal weight’ rating on the stock and has reduced the target price to Rs 300 per share. The company’s lowest-ever net slippages have been masked by credit costs above consensus estimates, the foreign broking firm said, predicting that the stock is likely to face pressure in the near term.

Credit costs as a percentage of loans in the June quarter came in at 2.5 percent for the NBFC, much higher than estimate of 1.8 percent. Provisions and write-offs at Rs 526 crore were 18 percent lower on-year but significantly higher than nil provisioning in the March quarter.

“Extra provisions is to strengthen balancesheet. We don’t expect decline in NIM to impact return on assets. Second half of the year is the best for rural business,” Ramesh Iyer, MD and VC, Mahindra Finance, told CNBC-TV18.

On the back of this, Citi has a rather bullish view on the stock. Despite Q1 results missing estimates due to plunging NIMs and rising credit costs, Citi believes growth should take precedence over spreads. Though it has revised its net profit estimate downwards by 8 percent/7 percent for FY24/25, it has a ‘buy’ rating on the stock with target price of Rs 355.

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