* price as on January 01, 0001

India

Previous target:	350
Up/downside:	35.6%
Reuters	MMFS.BO
Bloomberg:	MMFS IN
Market cap:	US$5,400m
	Rs392,095m
Average daily turnover:	US$14.8m
Current shares o/s:	1,232.3m
Free float:	46.4%

Key changes in this note

Our channel check on MMFS indicates its rising focus on customer quality, improved incentive-linked pay structure and increased use of technology.

Price performance	1M	3M	12M
Absolute (%)	13.3	43.3	76.1
Relative (%)	11.7	30.2	47.6

Major shareholders	% held
Mahindra & Mahindra	52.0
LIC	6.3
HDFC Life	2.6

Analyst(s)

Jignesh SHIAL

T (91) 22 4161 1547
E jignesh.shial@incredcapital.com

Mayank AGARWAL

T (91) 22 4161 0000
E mayank.agarwal@incredcapital.com

Execution-led turnaround visible on ground

Our ground check with various dealers, DSAs & customers indicate MMFS’s rising focus on better quality customers and increased use of technology.

The visible efforts towards improved sourcing & credit quality will drive granularity in credit costs & reduced earnings volatility in future.

We expect the valuation gap to CIFC to narrow for MMFS as it achieves earnings consistency. Retain ADD rating. TP at Rs430 or 2.5x FY25F BV.

Our channel check indicates MMFS’ focus on quality growth

Our ground check with various dealers, direct sales agents or DSAs and customers across different geographies indicate an improving momentum for Mahindra & Mahindra Finance or MMFS on growth as well as asset quality fronts. The rising focus on better quality customers, growth aggression through improved incentive-linked pay structure and increased use of technology and data analytics are some of the observations that we made during our discussions with industry players.

Shift to affluent customer base via diversified offerings

MMFS is focusing on the affluent customer base from semi-urban and rural India through diversified product offerings and maintaining superior underwriting standards. The company is also focusing on diversity by introducing differentiated products including micro enterprise loans, loans against property, lease financing and unsecured personal and consumer loans across rural and semi-urban pockets in India. Management is also investing in various tech-enabled platforms for seamless execution.

Superior customers come at low yield and lower acquisition cost

MMFS is aware of yield compromise in case of superior customer acquisition which, in turn, may exert pressure on its margins in the coming years. However, the acquisition cost for such a customer is relatively low and also attracts lower credit cost which, we feel, should compensate for margin loss and improve overall profitability.

Retain its high conviction bet status; discount versus CIFC to narrow

MMFS has a track record of volatile asset quality. However, with improved customer sourcing, a rising mix of low-risk products and an efficient & timely collection mechanism, profitability may see a meaningful improvement. MMFS is one of our high-conviction ideas due to its attractive risk-reward & improving return ratios. We feel the discounting gap between Cholamandalam Investment and Finance Corporation & MMFS will narrow gradually, with asset quality improvement leading to more credit cost granularity for MMFS.

Outlook & valuation

We increase our earnings estimates for FY25F/26F, mainly led by moderation in long-term credit cost to ~150-160bp vs. ~180bp earlier. We retain ADD rating on MMFS with a higher target price of Rs430 (Rs350 earlier) or ~2.5x FY25F BV. Downside risks: Slowing growth, and deterioration in asset quality.

Financial Summary	Mar-22A	Mar-23A	Mar-24F	Mar-25F	Mar-26F
Net Interest Income (Rsm)	57,795	63,853	78,252	97,880	116,740
Total Non-Interest Income (Rsm)	191	941	998	1,123	1,237
Operating Revenue (Rsm)	57,986	64,794	79,250	99,003	117,978
Total Provision Charges (Rsm)	(23,683)	(9,992)	(14,768)	(18,021)	(22,336)
Net Profit (Rsm)	9,888	19,848	24,049	31,858	37,827
Core EPS (Rs)	8.02	16.10	19.50	25.84	30.68
Core EPS Growth	195%	101%	21%	32%	19%
FD Core P/E (x)	39.57	19.71	16.27	12.28	10.34
DPS (Rs)	3.60	6.00	7.00	10.00	12.00
Dividend Yield	1.13%	1.89%	2.21%	3.15%	3.78%
BVPS (Rs)	126.7	138.6	151.1	166.9	185.6
P/BV (x)	2.50	2.29	2.10	1.90	1.71
ROE	6.5%	12.1%	13.5%	16.3%	17.4%
% Change In Core EPS Estimates
InCred Research/Consensus EPS (x)

Figure 1: Revision in our earnings estimates for MMFS

Y/e Mar (Rs m)	FY24F			FY25F			FY26F
Y/e Mar (Rs m)	Earlier	Revised	% change	Earlier	Revised	% change	Earlier	Revised	% change
Net interest income	77,653	78,252	0.8%	95,454	97,880	2.5%	1,13,645	1,16,740	2.7%
PPOP	46,232	46,833	1.3%	58,080	60,498	4.2%	69,693	72,772	4.4%
PAT	23,657	24,049	1.7%	28,615	31,858	11.3%	34,475	37,827	9.7%
EPS (Rs)	19.2	19.5	1.7%	23.2	25.8	11.3%	27.9	30.6	9.7%
AUM (Rs)	10,08,342	10,18,250	0	12,05,672	12,34,405	0	14,30,606	14,73,033	0

BY THE NUMBERS

Profit & Loss

(Rs mn)	Mar-22A	Mar-23A	Mar-24F	Mar-25F	Mar-26F
Net Interest Income	57,795	63,853	78,252	97,880	116,740
Total Non-Interest Income	191	941	998	1,123	1,237
Operating Revenue	57,986	64,794	79,250	99,003	117,978
Total Non-Interest Expenses	(19,466)	(25,402)	(30,169)	(35,852)	(42,076)
Pre-provision Operating Profit	37,252	37,519	46,833	60,498	72,772
Total Provision Charges	(23,683)	(9,992)	(14,768)	(18,021)	(22,336)
Operating Profit After Provisions	13,569	27,526	32,066	42,477	50,435
Pretax Income/(Loss) from Assoc.
Operating EBIT (incl Associates)	13,569	27,526	32,066	42,477	50,435
Non-Operating Income/(Expense)
Profit Before Tax (pre-EI)	20,872	36,285	42,400	54,569	64,462
Exceptional Items
Pre-tax Profit	13,569	27,526	32,066	42,477	50,435
Taxation	(3,682)	(7,134)	(8,016)	(10,619)	(12,609)
Consolidation Adjustments & Others
Exceptional Income - post-tax		(545)
Profit After Tax	9,888	19,848	24,049	31,858	37,827
Minority Interests
Pref. & Special Div
FX And Other Adj.
Net Profit	9,888	19,848	24,049	31,858	37,827

Balance Sheet Employment

(Rs mn)	Mar-22A	Mar-23A	Mar-24F	Mar-25F	Mar-26F
Gross Loans/Cust Deposits
Avg Loans/Avg Deposits
Avg Liquid Assets/Avg Assets	84.6%	85.9%	86.2%	87.5%	88.8%
Avg Liquid Assets/Avg IEAs	106.1%	105.0%	101.7%	100.2%	101.0%
Net Cust Loans/Assets
Net Cust Loans/Broad Deposits
Equity & Provns/Gross Cust Loans
Asset Risk Weighting
Provision Charge/Avg Cust Loans
Provision Charge/Avg Assets
Total Write Offs/Average Assets

BY THE NUMBERS…cont’d

Balance Sheet

(Rs mn)	Mar-22A	Mar-23A	Mar-24F	Mar-25F	Mar-26F
Total Gross Loans	609,055	794,550	999,403	1,217,213	1,473,333
Liquid Assets & Invst. (Current)
Other Int. Earning Assets
Total Gross Int. Earning Assets	609,055	794,550	999,403	1,217,213	1,473,333
Total Provisions/Loan Loss Reserve
Total Net Interest Earning Assets	609,055	794,550	999,403	1,217,213	1,473,333
Intangible Assets
Other Non-Interest Earning Assets	5,727	26,226	28,849	31,462	34,324
Total Non-Interest Earning Assets	17,925	39,406	44,707	48,069	51,755
Cash And Marketable Securities	41,507	28,320	2,344	3,056	24,405
Long-term Investments	84,403	99,890	107,881	116,512	128,163
Total Assets	752,890	962,166	1,154,334	1,384,850	1,677,655
Customer Interest-Bearing Liabilities
Bank Deposits
Interest Bearing Liabilities: Others	558,138	715,040	854,467	1,009,626	1,195,840
Total Interest-Bearing Liabilities	558,138	715,040	854,467	1,009,626	1,195,840
Banks Liabilities Under Acceptances
Total Non-Interest Bearing Liabilities	38,471	76,240	113,577	169,426	253,011
Total Liabilities	596,609	791,280	968,044	1,179,052	1,448,851
Shareholders Equity	156,281	170,886	186,290	205,798	228,804
Minority Interests
Total Equity	156,281	170,886	186,290	205,798	228,804

Key Ratios

(Rs mn)	Mar-22A	Mar-23A	Mar-24F	Mar-25F	Mar-26F
Total Income Growth	0.1%	10.5%	22.6%	25.1%	19.3%
Operating Profit Growth	(9.9%)	2.3%	24.6%	28.7%	20.2%
Pretax Profit Growth	226%	103%	16%	32%	19%
Net Interest To Total Income	99.7%	98.5%	98.7%	98.9%	99.0%
Cost Of Funds	6.85%	7.19%	7.20%	6.90%	6.60%
Return On Interest Earning Assets	16.0%	15.6%	15.0%	14.6%	14.1%
Net Interest Spread	9.12%	8.43%	7.82%	7.73%	7.49%
Net Interest Margin (Avg Deposits)
Net Interest Margin (Avg RWA)
Provisions to Pre Prov. Operating Profit	64%	27%	32%	30%	31%
Interest Return On Average Assets	7.59%	7.45%	7.39%	7.71%	7.62%
Effective Tax Rate	27.1%	25.9%	25.0%	25.0%	25.0%
Net Dividend Payout Ratio
Return On Average Assets	1.30%	2.31%	2.27%	2.51%	2.47%

Key Drivers

(Rs mn)	Mar-22A	Mar-23A	Mar-24F	Mar-25F	Mar-26F
ITEM_KEY_01	N/A	N/A	N/A	N/A	N/A
ITEM_KEY_02	N/A	N/A	N/A	N/A	N/A
ITEM_KEY_03	N/A	N/A	N/A	N/A	N/A
ITEM_KEY_04	N/A	N/A	N/A	N/A	N/A
ITEM_KEY_05	N/A	N/A	N/A	N/A	N/A
ITEM_KEY_06	N/A	N/A	N/A	N/A	N/A
ITEM_KEY_07	N/A	N/A	N/A	N/A	N/A
ITEM_KEY_08	N/A	N/A	N/A	N/A	N/A
ITEM_KEY_09	N/A	N/A	N/A	N/A	N/A
ITEM_KEY_10	N/A	N/A	N/A	N/A	N/A

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