Mahindra & Mahindra Financial Services

*Mahindra & Mahindra Financial Services (MMFS) has been scaling new highs for the past few months.* Its monthly operational update for May brings cheer with disbursements rising as much as 39.6% YoY and 9.9% QoQ to Rs 4,150 crore. Healthy loan disbursal and stable collections have led to a 3.3% YoY increase in its AUM to Rs 85,500 cr. May’23 disbursement volumes indicate robust demand. MMFS also said its stage-3 and stage-2 assets continued to remain range-bound in May compared with March. Its gross and net stage-3 assets stood at 4.5% and 1.9%, respectively in Q4FY23. Asset quality of its remaining range-bound during the seasonally slower 1Q is seen as a positive. As such, its asset quality metrics have shown a consistent improvement in the past few quarters. Gross and net stage-3 assets stood at 15.5% and 7.8% in Q1FY22, respectively (stage-3 assets are loans that are overdue for more than 90 days). Under the Vision 2025 plan, it has taken multiple initiatives to improve its asset quality metrics, including diversifying its product mix and its customer base by catering to an affluent rural and semi-urban customer segment. Under this plan, it intends to maintain its stage-3 assets below 6% in the coming years. With strong collection efficiency and improving asset quality, management expects credit costs to remain benign going forward. Some near-term risks loom. For one, how the monsoon pans out could have a significant impact on its disbursements. Impact of monsoon on growth and asset quality is a key monitorable. Also, the trend of NIM is another factor to monitor. Most expects the metric to compress ahead on account of the increase in cost of funds. However, management expects to maintain NIM at 7.5% in CFY aided by lending to high-yield segments such as pre-owned vehicles and tractors. In FY23, its NIM stood at 7.6%.