Mahindra Finance shares tank 12% after poor Q2 show; what's next for NBFC

Shares of Mahindra & Mahindra Financial Services Ltd (Mahindra Finance) crashed during the early trading session on Monday after the company reported a disappointing performance in the period ended on September 30, 2023. The company initially hit the first lower circuit of 10 per cent, before extending its weakness further.

The Mahindra group's non-banking financial company's (NBFC) net profit tumbled 48 per cent year-on-year (YoY) basis to Rs 235 crore in the September 2023 quarter.  The shadow lender's provisions and write-offs rose 216 per cent year-on-year to Rs 627 crore in the quarter under review.

NBFC's net interest income (NII) increased by 9 per cent YoY to Rs 1,674 crore in Q2FY24. The company's total income rose over 24 per cent year-on-year to Rs 3,240.5 crore for the July-September 2023 period, while its loan book, or assets under management (AUM) grew 27 per cent YoY to Rs 93,723 crore.

Following the results announcement, shares of Mahindra Finance dropped about 12 per cent to Rs 245.05, commanding a total market capitalization of little more than 30,000 crore. The scrip had previously settled at Rs 277.35 in the previous trading session on Friday at the BSE.

Brokerage firms have cut their EPS estimates for Mahindra Finance after multiple disappointments in sharp NIM decline, elevated operational expenses and much higher credit cost Some analysts believe that earnings may undergo material cut, which has subsequently led to downgrades and target price cuts.

The substantial miss on earnings was driven by steeper-than-expected 30 bps margin contraction and significantly large credit cost. Management alluded to some weakness in collections during the later part of September leading to significant flows from stage-II into stage-III. Loan write-offs remain significant, said YES Securities, downgrading it to 'neutral' and a target price of Rs 300.

"Credit cost shot up on a high base because of monsoon-related slippage. We are cutting FY24E and FY25E EPS by 25 per cent and 18 per cent, respectively, building in a lower NIM and a sharp hike in credit cost," said Nuvama Institutional Equities. "Before these cuts, our EPS was in line with consensus." It has a 'reduce' rating on Mahindra Finance with a revised target price of Rs 260.

Mahindra Finance reported a disappointing quarter, with margins that were lower than conservative estimates and a sharp rise in credit costs that led to a decline in earnings, said Kotak Institutional Equities.

"Seasonal tailwinds and focus on recoveries in stable macro will likely drive some NPL reversals in second half and an increase in lending rates should gradually improve NIMs hereon. We cut estimates and are cautiously optimistic after the recent stock correction," it retained 'add' rating but slashed the fair value to Rs 310 from Rs 330 earlier.

Mahindra Finance reported disappointing earnings for 2QFY24. NIMs compression due to rising CoB is NBFC wide narrative however Mahindra Finance faced twin challenges- yield compression and rising CoB, said Centrum Broking downgrading it to an 'accumulate' rating after increase in loan loss provisions hit earnings. It has target price of Rs 302 on the stock.

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