MMFS Q2FY24: PAT Drops to 235 Cr YoY Amid 45 bps NIM Compression

Company Overview:

M&M Finance, a leading Non-Banking Financial Company (NBFC), specializes in financing various types of vehicles, including new and pre-owned autos, utility vehicles, tractors, passenger cars, and commercial vehicles. Additionally, the company offers a range of financial services, encompassing mutual fund distribution, insurance broking, and housing finance. M&M Finance has strategically diversified its lending portfolio, extending its reach to retail and small to medium-sized enterprises in rural and semi-urban areas across India. As of Q2FY24, the company boasts an extensive network, with 1,368 offices spanning 27 states and 7 union territories, serving a substantial customer base of over 9.5 million individuals.

Loan book grew 27% YoY (+8.1% QoQ) to 93,723 Cr, fueled by auto and pre-owned vehicle loans.

M&M Finance experienced a remarkable 27% YoY increase in its loan book, with a further 8.1% QoQ growth, amounting to 93,723 Cr in Q2FY24. This growth was primarily driven by a strong performance in the auto, car, and pre-owned vehicle segments. Notably, the company’s disbursements increased by 12.61% YoY and 9.45% QoQ, reaching 13,315 Cr in the same period. The performance of the tractor portfolio and SME segments, however, remained sluggish. The Cars and Commercial Vehicles segment displayed notable growth of 25% YoY and 28% YoY, standing at 2,455 Cr and 1,511 Cr, respectively, while maintaining market share in various segments. New business segments, including SME, personal loans, and consumer loans, contributed approximately 12% to the overall loan mix.

NIMs compression ~45 bps QoQ and high credit cost ~2.8% (Q2FY23 – 2.5%):

In Q2FY24 yield moderated at ~35% bps QoQ while CoF rose 10 bps led to NIMs contraction by 45 bps QoQ stood at 6.5% in Q2 due to effect of change in portfolio mix (with higher mix of pre-owned vehicles and tractors) and increased interest cost. Annualized credit cost stood at 2.8% (Q2FY23-2.5%) higher than expectation for FY24 targeted between 1.5% -1.7% and included INR 3.5 bn of write-off (PQ-3.1 bn).

Minor improvement in asset quality & CAR strong at 18.7% in Q2

In Q2FY24, minor improvement in asset quality with GS3/NS3 declining to 1bps/9bps QoQ to 4.29%/1.71% with amounting GS3/NS3 stood at 4,024 Cr/1,562 Cr. Stage 2 declined 60 bps QoQ to 5.7% this resulted in 30+ dpd improving 70 bps QoQ to 10% and current level of write-off stood at 351 Cr in Q2FY24. Provision coverage on stage-3 assets stood at 61.2% against 60.1% in previous quarter. CAR strongly stood at 18.70% in Q2FY24 which is above the RBI guidelines 15%.

Valuation and Key ratios: ROA/ROE decline -130 bps/500 bps

Currently, M&M Finance’s stock is trading at 1.63 times its book value, at 151 per share, with the market price at 248 Rs. The company reported a decline in return ratios, with ROE decreasing by approximately 500 bps to 5.5%, and ROA decreasing by 130 bps to 0.9% in Q2FY24. The interest coverage ratio stood at 1.44x, indicating the company’s solvency.

Q2 FY24 Results Highlights: Standalone

➡️ In Q2FY24, interest income grew 25.32% YoY (+3.91% QoQ) to 3,153 Cr while interest expense grew 46.56% YoY (+8% QoQ) to 1,566 Cr resulted in Net interest (NII) income reaching to 1,587 Cr grew 9.64% YoY (+0.17% QoQ).

➡️ Pre-Provision operating profit (PPOP) increased 9.17% YoY (-5.07% QoQ) to 943 Cr due to rise in Opex by 8.32% QoQ because of company’s transformation strategy includes technology investment. Opex-to-average assets remained stable at 2.8% in Q2FY24.

➡️ Provision amount increased 215.72% YoY (+19.02% QoQ) to 626.55 Cr which includes 351 write-off led to decline PAT by 48% YoY (-33.30% QoQ).

➡️ PAT decline 47.54% YoY (-33.30% QoQ) to 235 Cr due to increase in provision 215% YoY results in EPS stood at1.90 Rs (PQ-2.84) decline 33% QoQ.

Conclusion:

M&M Finance continues to expand its loan book and customer base, showcasing its presence and performance in the NBFC sector. While challenges in NIMs and higher credit costs require attention, the company’s strong CAR and provision coverage are notable strengths. The decline in return ratios reflects certain performance pressures, and management should focus on addressing these concerns to ensure sustained growth and profitability.