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Business News/ Markets / Mark To Market/  Mahindra Finance hits new 52-week high on robust Q4, but beware potential risks

Mahindra Finance hits new 52-week high on robust Q4, but beware potential risks

  • Poor monsoon resulting in demand slowdown in rural centres can play spoilsport for Mahindra Finance given its high exposure to the market. This, along with sustainability of the company’s performance are key monitorables going forward

Mahindra Finance expects to maintain NIM at 7.5% by diversifying its product mix into higher-yielding segments such as pre-owned vehicles and tractors. (Photo: Bloomberg)

Shares of Mahindra & Mahindra Financial Services Ltd (Mahindra Finance) rose 5% on Tuesday, hitting a new 52-week high of 278 on the National Stock Exchange, following a strong March quarter (Q4FY23) performance.

Shares of Mahindra & Mahindra Financial Services Ltd (Mahindra Finance) rose 5% on Tuesday, hitting a new 52-week high of 278 on the National Stock Exchange, following a strong March quarter (Q4FY23) performance.

The company's asset quality metrics showed consistent improvement, with gross stage-3 assets dropping to 4.5% in March 2023 from 5.9% in December, and 7.7% in March last year. The management aims to keep stage-3 assets below 6% under its Vision 2025 plan. Stage-3 assets are loans that are overdue for more than 90 days.

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The company's asset quality metrics showed consistent improvement, with gross stage-3 assets dropping to 4.5% in March 2023 from 5.9% in December, and 7.7% in March last year. The management aims to keep stage-3 assets below 6% under its Vision 2025 plan. Stage-3 assets are loans that are overdue for more than 90 days.

Assets under management (AUM) grew 27% year-on-year (YoY), driven by a 50% YoY increase in loan disbursements across all segments and stable collections. Net interest margin (NIM) remained stable at 7.4% in Q4FY23, though analysts predict a contraction due to higher costs of funds. Analysts at Kotak Institutional Equities expect a 60 basis points (bps) rise in borrowing costs to 7.6% from 7% in FY23.

“We expect the company to pass on any further repo and MCLR rate hikes to borrowers. However, the 30-40 bps difference between incremental cost of borrowings and weighted average cost of borrowings will likely lead to a 40 bps NIM compression, as the cost of borrowing catches up to the incremental rate in FY2024E," they said in a report dated 2 May.

Even so, the management expects to maintain NIM at 7.5% by diversifying its product mix into higher-yielding segments such as pre-owned vehicles and tractors. A focus on affluent rural and semi-urban customers may lead to reduced operating and credit costs.

However, there remain downside risks. Poor monsoon resulting in demand slowdown in rural centres can play spoilsport for Mahindra Finance given its high exposure to the market. This, along with the sustainability of the company’s performance are key monitorables going forward.

“Incrementally, the focus is likely to be on the sustenance of margins and improving opex intensity, with a shift in customer and product profile, which remains a work in progress. While we have been constructive on the turnaround, we await evidence of a secular improvement in these metrics, before ascribing a higher multiple," said analysts at HDFC Securities Ltd.

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