Mahindra Finn’s August metrics provide relief but no clarity

Last week, the firm said its disbursements grew 57% year-on-year in August ₹2,150 crores. In addition, the collection capacity increased to 97% from 95% in July and 90% in June. In short, the lender has shown consistent improvement, helping to contain the second Covid wave.

The increase in collection efficiency is good news for Mahindra Finance’s asset quality, something the lender has been struggling with so far. In fact, the company said in its release last week that during the second quarter so far the bad loans have come down. The company expects this decline to continue in September and the coming months.

Analysts believe that recovery in collections paves the way for bad loans, also known as stage 3 assets. In Q1, bad loans had grown to a massive 15.5% of the total book from 9% in Q4FY21. The total stressed pool of debt stood at 33% of the book in Q1. No wonder, it had to strengthen provisions for the quarter. Its credit costs soared and the outlook on earnings dimmed. Shares have been under pressure since then and are down about 6% year-over-year despite recent gains. “With revival in economic activity and establishment of normalcy, there were expectations of roll-backs, upgrades and provisioning write-backs,” said analysts at ICICI Securities Ltd.

While the recent recovery may be encouraging, there are challenges as well. One, the monsoon is likely to be below normal. Spatial and temporal distribution is also important for agricultural production. Second, the tractor sales figures in the recent past have not been pleasant. This shows the difficulties Mahindra Finance will face while growing. Thus, the asset under management growth has been on a steady decline for more than two years now. As a result, Mahindra Finance’s profitability may remain under pressure.

“Earnings volatility, asset quality behavior and growth underperformance for peers will cap the FY23E book re-rating at more than 1.1 times,” said analysts at ICICI Securities.

The brokerage has kept its ‘Reduce’ rating on the stock unchanged. With the recent gains, the shares are trading at around 1.4 times the estimated book value for FY22.