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Informist, Friday, Oct. 18, 2024

By Sachi Pandey

MUMBAI – Mahindra & Mahindra Financial Services Ltd. is expected to report mixed results for the second quarter of 2024-25 (Apr-Mar), marked by strong net interest income growth but accompanied by rising credit costs and deteriorating asset quality. The non-banking financial company's net profit after tax is expected to rise 98% on year to INR 4.65 billion, according to an average of estimates from nine brokerages. However, profit is expected to decline 9.26% sequentially, following the INR 5.13 billion net profit reported in Apr-Jun.

The estimates for net profit range from INR 3.82 billion to INR 5.16 billion. The non-bank lender is scheduled to announce its earnings for the quarter ended September on Tuesday. The company's net interest income is projected to increase by 18.9% year-on-year to INR 18.87 billion, compared to INR 17.84 billion in the previous quarter.

Despite these encouraging estimates, brokerages like Centrum Broking and Emkay Global Financial Services cautioned that the company's disbursement growth has slowed. The lender's overall disbursements fell 1% on year to INR 131.60 billion in the quarter ended September, the company had informed exchanges earlier this month. Centrum Broking expects this slowdown to persist as the company concentrates on enhancing its internal underwriting processes, potentially curbing near-term growth. For Apr-Sept, disbursements are estimated at around INR 259 billion, rising 2% on year, brokerages said.

While the company's business assets grew around 20% year-on-year to INR 1.13 trillion, its asset quality has deteriorated, according to an exchange filing. The company reported that Stage-3 assets reached 3.8%, while Stage-2 assets were at 6.4% as of Sept. 30. The company's Stage-3 and Stage-2 assets were below 10% as on Jul 31. Brokerages see the rise in Stage-2 and Stage-3 assets as an indication of mounting stress in the loan portfolio, though they expect a gradual recovery fuelled by rural demand, but warn that the improvement in return on assets could take time.

The rise in credit costs is another significant concern flagged by several brokerages. Emkay Global expects credit costs of the company to rise to 2.1%, driven by increased Stage-2 and Stage-3 assets, reflecting heightened slippages. 

Kotak Institutional Equities sees a slight contraction in the company's net interest margin on quarter due to a shift in business mix and higher borrowing costs. This performance is in line with broader industry trends where non-banking financial companies have been grappling with rising borrowing costs, which are putting pressure on margins despite stable asset quality.

YES Securities highlighted weakness in the company's vehicle financing segment, particularly in passenger vehicles, where growth has slowed. The brokerage suggested that focusing on used vehicle financing could help revive the segment.

Despite these headwinds, some brokerages maintain a positive long-term outlook on M&M Financial. Three brokerages forecast over 20% year-on-year increase in assets under management for Jul-Sept and expect net interest income to support a 25-27% rise in pre-provision operating profits. The brokerage firms view the company's strong business asset growth as a positive, though it acknowledges that higher credit costs will likely offset some of the gains.

Overall, while M&M Financial is poised to deliver strong profit growth for the quarter, brokerages remain cautious due to slowing disbursements, deteriorating asset quality, and rising credit costs. The company's ability to manage these headwinds, particularly in its vehicle finance business, will be crucial in shaping its performance in the coming quarters, according to brokerage firms. 

Following are the Jul-Sept earnings estimates for the company, in million rupees, based on reports from nine brokerages:

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Edited by Ashish Shirke

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