Can M&M Finance sustain its 27% rally amid improving margins?

Synopsis

Mahindra & Mahindra Financial Services shares have surged significantly, outperforming the NBFC index due to strong Q2 performance. Robust auto financing, a GST rate cut, and improved net interest margins, driven by lower funding costs and higher fee income, are fueling this growth. Analysts anticipate continued momentum and an improved return on assets in the coming years.

ET Intelligence Group: Shares of Mahindra & Mahindra Financial Services (MMFS), the largest financier of tractors, have surged 27% over the past three months, including a 13% gain over the past month. The ET NBFC index has gained 4% and 2.3% during the said periods respectively. A strong second-quarter performance boosted by robust traction in the auto financing business following a rate cut in the goods and services tax (GST) aided the stock's outperformance.

The company reported 13% year-on-year growth in assets under management (AUM) and a healthy expansion in net interest margin (NIM) for the quarter, aided by a reduction in cost of funds. The momentum is likely to continue in the coming quarters.

NIM improved to 7% in the September quarter from 6.5% a year ago, supported by higher fee-based income and dividend inflows from its wholly owned insurance subsidiary Mahindra Insurance Brokers. The company expects to maintain NIM at the current level in the medium term. A 30 bps decline in cost of funds also contributed to margin gains, with the company benefiting from a funding mix where around 41% of borrowings are floating-rate while lending remains largely fixed-rate.

Analysts expect the company's return on assets (RoA) to improve over the medium term, following three consecutive years of decline. RoA fell to 1.9% in FY25, from 1.7% in FY24 and from 2.3% in FY23.

Agencies

analysts upbeat Improving spreads, lower credit costs and stable asset quality to lift returns over medium term

PL Capital expects the company's RoA to trend higher over the medium term, driven by improving spreads and lower credit costs. "Company expects credit cost to improve to 1.3%-1.7% over the long term, resulting in RoA improving to 2.2%-2.5%. We expect RoA to improve to 2.1% by FY28E, led by the improvement in spread and credit cost," the broking firm said in a report. It has upgraded the stock's target price to ₹375 from ₹300.

Motilal Oswal Financial Services expects net profit to increase by 19% annually between FY25 and FY28 and projects return on assets and return on equity to improve to 2.2% and 14%, respectively by FY28, reiterating its buy rating with a target price of ₹400.

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