Mahindra Finance Set For H2 Recovery, Focus On Asset Quality

Mahindra and Mahindra Financial Services (MMFS) is set for a strong recovery in the second half of FY25, according to a report by Axis Capital. Despite subdued growth in Q1 due to slowdowns in key sectors such as passenger vehicles and tractors, the company is strategically positioned to capitalise on the festive season and strengthen its asset base. 

Axis Capital expects MMFS to achieve an Assets Under Management (AUM) growth of approximately 20 per cent year-on-year (YoY) and disbursement growth of 18 per cent YoY in FY25.

The report noted that Mahindra Finance’s AUM growth in Q1FY25 was steady at 23 per cent YoY, driven largely by its increasing share in the used vehicle business, which contributed 13 per cent to its AUM and 17 per cent to disbursements. As the company expands its footprint in the used vehicle segment and plans to enter the mortgage business, MMFS is well-positioned to enhance its balance sheet and boost long-term growth.

Margin Levers And Borrowing Mix
To address concerns over Net Interest Margins (NIMs), MMFS has initiated several measures, including raising lending rates. This move is expected to improve profitability, especially given the company's well-diversified borrowing mix, which keeps funding costs in check. According to Axis Capital, MMFS has managed to limit its cost of funds increase to just 10 basis points (bps) quarter-on-quarter (QoQ) in H1, a significant achievement given the rising interest rate environment.

MMFS also benefits from a fixed-rate loan book, positioning the company to manage its NIMs even in the event of future rate cuts. Additionally, its cost-to-income ratio of 41 per cent offers room for operational leverage, which is likely to contribute to improved return ratios as growth accelerates in the second half of FY25.

Focus On Asset Quality
Maintaining asset quality is a top priority for Mahindra Finance. The company has set a target to keep its Gross Stage 3 (GS3) assets below 3.4 per cent by the end of FY25. Although GS3 stood at 3.6 per cent in Q1FY25, the company’s prudent risk management practices and enhanced collection mechanisms are expected to bring this figure down. Axis Capital highlights that Mahindra Finance’s provision coverage ratio (PCR) declined slightly by 3.5 per cent QoQ to 59.8 per cent in Q1, guided by the Expected Credit Loss (ECL) model.

The management anticipates further moderation in PCR toward the year-end, potentially resulting in the release of provisions and a positive impact on earnings. The company's credit costs, which stood at 1.5 per cent in Q1FY25, are expected to reduce in the second half of the year, supported by an improvement in collection efficiency, which remains aligned with historical trends at 94 per cent.

Key Strategic Moves
Mahindra Finance's expansion into the mortgage sector is another critical growth lever. The company aims to offer housing loans, loan-against-property (LAP), and lease rental discounting (LRD) as part of its foray into this space. With the team gradually taking shape, the mortgage business is expected to drive growth in longer-duration and higher-value assets.

In addition to mortgages, the company recently received a corporate agency licence from the Insurance Regulatory and Development Authority of India (IRDAI) to distribute insurance products. It has already onboarded six partners to capitalise on this opportunity, which will likely provide an additional stream of fee-based income.

Comparison With Competitors
In comparison to its peers like Cholamandalam Investment  and Finance Company (CIFC), Mahindra Finance’s business potential remains robust. Although MMFS currently has lower yields than CIFC, the increasing share of used commercial vehicles (13 per cent of AUM) and recent rate hikes are expected to narrow this gap in the coming quarters. With a cost-to-income ratio of 41 per cent, marginally higher than CIFC’s 39 per cent, MMFS has room for operational efficiency gains, which should become evident in H2FY25.

Axis Capital projects MMFS will achieve a Return on Assets (RoA) of approximately 1.9 per cent for FY25, aligning with its competitive positioning in the vehicle finance sector.

Future Outlook 
Axis Capital anticipates steady growth for Mahindra Finance, with its AUM expected to grow at a Compound Annual Growth Rate (CAGR) of 18 per cent over FY24-27. This growth is expected to be driven by the used vehicle segment and the new mortgage business. Additionally, the company’s focus on small and medium-sized enterprises (SMEs) will serve as another key growth driver in the years ahead.

The report highlights that Mahindra Finance’s advances are projected to reach Rs 1.18 trillion by FY25, a significant increase from Rs 991 billion in FY24. Disbursements are also expected to grow steadily, from Rs 562 billion in FY24 to Rs 745 billion in FY25.

Mahindra Finance’s near-term outlook remains optimistic despite some softness in Q1. With structural growth drivers intact and new business lines on the horizon, Axis Capital recommends a "Buy" rating with a target price of Rs 380, representing a potential upside of 17 per cent from the current price of Rs 324. The company's diversified portfolio, disciplined risk management, and strategic focus on operational efficiency make it a compelling investment opportunity in the financial services sector.