M&MFIN - Mahindra & Mahindra Financial Services Limited Share Price

Management's outlook for the second half of FY'26 appears optimistic, bolstered by improvements in the wheels business"”particularly in passenger vehicles and tractors"”due to favorable market conditions post-GST announcements. They anticipate sustained growth momentum into Q3 and parts of Q4, supported by increased festive demand.

Key forward-looking points include:

1. Wheels Business Growth: The company expects to benefit from rising demand in key segments. Specifically, they reported a 41% year-over-year growth in the tractor business for Q2. They project that overall AUM (Assets Under Management) growth will be around 13%, and income growth at 14%.

2. Improved NIM: The Net Interest Margin (NIM) has improved from 6.5% to 7%. This increase has been attributed to cost of funds (down by 30 bps) and higher income levels, which include steady performance from their wholly-owned subsidiary Mahindra Insurance Brokers Limited (MIBL).

3. Credit Quality and Costs: The management maintains a credit cost guidance of 1.7%. As of Q2, the gross Stage 3 (GS3) ratio is reported at 9.72%, which is an improvement compared to previous quarters. They aim to keep credit costs controlled while acknowledging the historical trend of higher credit costs in Q2.

4. Diversification Strategy: The management mentioned ongoing growth in the SME segment and fee-based incomes, which currently stand at 1.4% of their average assets. They also indicated plans to scale up their mortgage business through their housing finance subsidiary, now exhibiting healthy asset quality indicators (GS3 < 3%).

5. Forecast on Vehicle Finance Growth: Management anticipates passenger vehicle growth could achieve close to 12% for H2, fuelled by the combination of festive demand and the GST benefits.

Overall, the management expressed confidence in maintaining growth trajectories and improving profitability through strategic investments and operational efficiencies.

Here are the major questions and their responses from the Q&A section of the earnings transcript:

1. Question: "Would it be fair to assume that the ECL base is from September 2020 and is that why the credit cost looks high despite improving asset quality?"

   • Answer: I can clarify that for ECL computation, we utilize a 42-month period. The stock isolated for tracking would be from March 2022. Each year, we refresh the ECL model in Q3 to ensure it mirrors the portfolio's loss given defaults (LGD). So, the next base update will occur this December.

2. Question: "What is the trade advance limit for dealer funding this quarter?"

   • Answer: You're right. In Q2, we support dealers by boosting inventory, with a trade advance limit around Rs.6,800 crores. This could have slightly affected yields, as advanced funds don't generate immediate yield.

3. Question: "What are your insights on the CV segment's asset quality outlook?"

   • Answer: While H1 faced a muted environment, we expect better momentum in H2, especially post-festival seasons. However, I remain cautious about the CV segment as we haven't observed significant growth yet, despite some recovery from Q1.

4. Question: "What's your confidence level in containing credit costs within the 1.7% guidance?"

   • Answer: Our goal is firmly set on maintaining credit costs within 1.7%. Despite some uptick in Q2, given past patterns, we believe we can achieve this as we enter Q3 and Q4, considering the stability we've maintained.

5. Question: "How has used vehicle disbursement been growing?"

   • Answer: Our used vehicle disbursement has risen due to both existing customer funding and market participation. This segment now represents about 18% of our incremental disbursements, and we anticipate continued investment.

6. Question: "Is the ECL reset exercise expected to affect credit costs?"

   • Answer: The ECL reset is an annual endeavor to keep the model in sync with our portfolio's nature. I don't forecast any significant hazard to our guidance. Observing this clearly will contribute to our decisions moving forward.

7. Question: "How do you foresee growth for the remainder of FY'26?"

   • Answer: Following the festive momentum, I've detected improved trends, especially in passenger vehicles where growth is now anticipated at about 12% for H2. Our disbursement growth will benefit from this upward movement.

8. Question: "What is the potential to bring in unsecured loans into your portfolio?"

   • Answer: Assembling effective credit scoring models is paramount. We aspire to achieve at least a 15% CAGR in disbursement growth. The focus remains on strategic avenues within our existing asset categories.

9. Question: "Do you expect further improvements in your cost of funds?"

   • Answer: We have seen some benefits in Q2. However, as we ramp up disbursements, the existing leverage situation may limit substantial further reductions in costs.

10. Question: "What's the plan for your housing finance subsidiary?"

    • Answer: We aim to improve efficiency in our housing finance franchise and have reduced staff from 6,300 to 4,700. Our recent ARC transaction has also significantly brought down GS3 levels.

Note: All answers are summarized to fit within the character limit while maintaining the essence of the responses provided.