Shares of Mahindra & Mahindra Financial Services, (MMFS), part of the Mahindra Group, slumped 14.40% to reach 237.35 apiece in early trade on Monday, a level not seen since April 2023, as the investors reacted negatively to the company’s Q2FY24 performance, which was released post-market hours on Friday. At 10:45 AM, the stock was trading with a drop of 9.45% at ₹251.30.
The company reported a 48% drop in its standalone net profit to ₹235 crore in Q2FY24, led by provision reversals. In comparison, during the same period of last year, the company reported a PAT of ₹448 crore, and in the preceding June quarter (Q1FY24), the PAT stood at ₹362 crore.
In Q2FY24, the company’s net interest income reached ₹1,674 crore, marking a 9% YoY growth, while it reported a PPoP (pre-provision operating profit) of ₹942.8 crore, reflecting a 9.2% YoY rise. During the quarter, yields moderated at 35 basis points QoQ, while CoF jumped 10 basis points, leading to a NIM contraction of 45 basis points QoQ.
“Yield moderation was attributed to a rising proportion of PrimeX customers, stronger growth in lower-yielding utility vehicles, and no interest rate hike on incremental lending,” said domestic brokerage firm Motilal Oswal.
“NIMs compression due to rising CoB is a wide narrative however, Mahindra Finance faced twin challenges: yield compression (upgrade to a better customer segment and a high proportion of interest-free advances this quarter) and rising CoB,” said brokerage firm Centrum Broking.
According to Centrum Broking, the company experienced increased credit costs in the second quarter, primarily due to rise in provisions and write-offs resulting from challenges in the tractor segment caused by erratic monsoon.
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The brokerage states that the company’s consistent growth in assets under management (AUM) remains robust. However, it points out that translating this growth into profitability is uncertain.
“2H is expected to be better as management has initiated yield hike in certain portfolios and a large chunk of dealer financing is expected to be converted into yield-earning assets, recoveries have been historically better in 2H, which may reflect in lower credit costs; however, opex may continue to remain elevated,” said Centrum Broking.
Following the company’s Q2FY24 performance, Centrum Broking lowered its rating on the stock to ‘Accumulate’ and set a target price of ₹302 apiece. On the other hand, Motilal Oswal retained its ‘buy’ call on the stock with a target price of ₹330 apiece.
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Motilal Oswal said that until two quarters ago, the company had managed to reduce volatility in its NIM and earnings performance by streamlining operations and enhancing risk management. MMFS has now reported two consecutive quarters of NIM volatility and elevated credit costs (despite minor improvements in asset quality).
Such repeated volatility in NIM and credit costs could affect investor confidence in its transformation journey. However, the brokerage believes that MMFS should see improvements in NIM and a moderation in credit costs in 2HFY24.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 30 Oct 2023, 11:20 AM IST