Mahindra Finance hits new 52-week high in strong fourth quarter, but beware of potential risks

Finance


Shares of Mahindra & Mahindra Financial Services Ltd (Mahindra Finance) rose 5% on Tuesday to a 52-week high. ¥It hit $278 on the National Stock Exchange following a strong performance in the March quarter (FY2023 Q4).

Shares of Mahindra & Mahindra Financial Services Ltd (Mahindra Finance) rose 5% on Tuesday to a 52-week high. ¥It hit $278 on the National Stock Exchange following a strong performance in the March quarter (FY2023 Q4).

The company’s asset quality metrics show consistent improvement, with Stage 3 total assets declining from 5.9% in December and 7.7% in March last year to 4.5% in March 2023. Management aims to keep Stage 3 assets below 6% of his under the Vision 2025 plan. Stage 3 assets are loans that are 90 days or more past due.

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The company’s asset quality metrics show consistent improvement, with Stage 3 total assets declining from 5.9% in December and 7.7% in March last year to 4.5% in March 2023. Management aims to keep Stage 3 assets below 6% of his under the Vision 2025 plan. Stage 3 assets are loans that are 90 days or more past due.

Assets under management (AUM) increased 27% year-over-year with loan originations up 50% year-over-year and solid collections across all segments. Net Interest Margin (NIM) remained stable at 7.4% in Q4 FY2023, but analysts expect it to narrow due to rising cost of funds. Analysts at Kotak Institutional Equities expect borrowing costs to rise by 60 basis points (bps) from 7% to 7.6% in 2023.

“We expect the company to pass on future repo and MCLR rate hikes to borrowers. NIM is likely to be compressed by 40 bps as it catches up with the incremental rate,” they said in a report dated May 2.

Still, management expects to keep NIM at 7.5% by diversifying its product mix into high-margin segments such as used cars and tractors. A focus on wealthy rural and semi-urban customers can lead to lower operating and credit costs.

However, downside risks remain. Weak monsoons leading to a slowdown in demand in rural centers could be devastating for Mahindra Finance given its high exposure to the market. This, along with the sustainability of the company’s performance, will be a key focus going forward.

“Phase-by-phase, as customer and product profiles change, the focus will likely be on maintaining margins and improving operating costs, which is still a work in progress. However, we are awaiting evidence of long-term improvement in these indicators before attributing higher multiples.



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