M&M Finance shares drop 6%, lead midcap losers. Here's why

Shares of Mahindra & Mahindra Financial Services Ltd (Mahindra Finance) plunged nearly 6 per cent in Friday's trade and was the worst index performer as BofA Securities downgraded the stock to 'Neutral' from 'Buy' as the stock valuations are at premium to long-term average and offer limited upside, the foreign brokerage said. The M&M Financial stock has 93 per cent rally from its 52-week low level, and a projection by Motilal Oswal Securities suggests a likely 32 per cent drop in YoY profit for the June quarter with single digit growth in sales. This brokerage though is positive on the stock's prospects.

The stock fell 5.63 per cent to hit a low of Rs 321.60 on BSE.  BofA Securities said M&M Finance stock trades at FY25E P/BV of 2.2 times, a premium to its long-term valuation average. It, however remain firm believers in the transformation journey underway at the company .  "The company's targeted diversification on both product (SME, LAP, Digital Finco) and customer (affluent rural and semi-urban) fronts should allow it to significantly reduce AQ volatility, which has been a key area of concern for investors," it said.

The brokerage has a target of Rs 375 per share on the stock valuing the tock at FY25 price-to-book value of 2.36 times, which will be 1SD above its long-term trading average.

Motilal Oswal Securities noted that vehicle financiers typically bear the brunt of a rising interest rate environment in the form of margin compression because of the fixed rate nature of a vehicle finance product.

"However, in a stable-to-declining interest rate regime, vehicle financiers will be better placed in terms of margin than other product segments. They are well-positioned to ride the strong underlying demand for vehicles, will incrementally start exhibiting plateauing of NIM and subsequently witness margin improvement," Motilal Oswal Securities said. This brokerage has price target of Rs 400 on the stock, which also suggests a limited upside ahead.

"While the company has exhibited volatile operating performance and weak asset quality in the past, we believe that the various strategic initiatives undertaken by the management have scripted a credible transformation. Strong liability franchise and deep moats in rural/semi-urban customer segments position MMFS well to reap rewards of the hard work that is ongoing into evolving this franchise. MMFS is benefitting from the strong sectoral tailwinds and its parent M&M’s strong recovery in auto volumes. This has reflected in healthy disbursement growth and we expect this momentum to sustain in FY24,".

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