Mahindra & Mahindra Financial Services Ltd. provided a promising business update for July, with positive growth indicators to note. The non-banking financial company reported a 12% year-on-year (YoY) increase in monthly disbursements, reaching 4,400 crore, and a 4% sequential growth. Robust disbursements contributed to a substantial 28% YoY surge in business assets, totalling ₹88,100 crore.
Furthermore, the company showcased stable asset quality metrics, as both Stage-3 and Stage-2 assets remained steady compared to June. The recently disclosed June quarter (Q1FY24) results demonstrate Mahindra Finance’s overall sound asset quality, although credit costs experienced a spike due to revised expected credit loss (ECL) provisioning.
Despite these encouraging developments, investors appear disappointed, resulting in a 2% decline in the stock in early trade on Thursday. There are concerns regarding the progress of monsoon, given that Mahindra Finance primarily serves customers in rural areas. Analysts from Motilal Oswal Financial Services emphasize that asset quality will be a crucial aspect to monitor in this context.
There are also concerns around the compression of net interest margin (NIM). The impact was already evident in Q1, where Mahindra Finance’s NIM dropped 60 basis points sequentially to 6.8%. This was primarily due to increased funding costs and a decline in yields due the company’s strategy to cater to higher-grade customers.
The rising cost of funds is expected to persist in the coming quarters, as interest rates continue to be repriced exerting pressure on NIM. ‘We expect another 10-basis points quarter-on-quarter increase in the cost of borrowings over the next two quarters, as the remaining loans are reset and maturity of older low-cost fixed-rate borrowings,’ said analysts from Kotak Institutional Equities in a report on 30 July.
Nonetheless, the company has been actively expanding its share of the pre-owned vehicle segment portfolio, which offers higher yields and is expected to counterbalance the rise in borrowing costs, thereby supporting margins. Additionally, a focus on reducing operating expenses and credit costs could also help.
To be sure, along with the trajectory of NIM and the impact of monsoon, analysts point out that the company has to focus on reducing volatilities in terms of yields and credit costs to sustain investors’ confidence. Until then, large upsides to the stock could be capped.
