Mark to Market M M Financial's upbeat view fails to inspire investors
Summary
- Higher provisions dented net profit and despite healthy assets under management growth of 27% year-on-year, net interest income lagged analysts’ expectations.
The Street despises earnings unpredictability and repeat offenders are usually punished severely. A case in point is Mahindra & Mahindra Financial Services Ltd (M&M Financial). The stock plunged on Monday, falling nearly 12% after the September quarter (Q2FY24) results disappointed on key parameters.
Higher provisions dented net profit and despite healthy assets under management (AUM) growth of 27% year-on-year, net interest income lagged analysts’ expectations. Reported net interest margin (NIM) at 6.5% fell by 30 basis points sequentially. Rising cost of borrowing, elevated credit costs and lower yields (due to shift in the product mix towards low-yielding segments) played spoilsport.
The management blamed muted Q2 performance on seasonal factors due to weak rural sentiments, but remains confident of 20% plus AUM growth in FY24. NIM is expected to inch up to 6.8% at the end of FY24 and hit around 7% by FY25-end. Margin growth would be aided by planned lending rate hikes and increased traction in higher-yielding products like tractors and pre-owned commercial vehicles. On the asset quality front, gross stage-3 assets are expected to ease to 3.5% by March 2025 from 4.3% in Q2. Stage-3 assets are loans that are overdue for over 90 days. Historically, the second half of the financial year sees better recoveries, the management said.
However, analysts are wary of the elevated operating expenses and low visibility on improvement in profitability. Plus, increased competitive intensity could restrict the ability to hike lending rates. So, for now, the management commentary has failed to avert downgrades in earnings estimates for FY24/FY25. “Over the last two-three quarters, the company’s shares have been seeing a re-rating on account of expectations of reduced seasonality and a more robust business model. But the poor Q2 show materially challenges the hypothesis of reduced seasonality," said analysts at Emkay Global Financial Services. In a bid to achieve better consistency in earnings performance, the company has laid out plans aiming at product and customer diversification (more exposure to affluent customers) by FY25. But this transition is likely to be a gradual process, at best. Until then, M&M Financial may struggle to strike a balance between margins and asset quality.