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Weekly Tactical Pick: Why this frontline NBFC looks good after a big blow

Market leading position, strong rural distribution network, and potential improvement in return ratios will act as growth levers for Mahindra Finance a.

This week’s tactical pick is Mahindra Finance (CMP: Rs 249, M Cap: Rs 30,850 crore, Nifty level: 19,124), a leading player in vehicle financing, predominantly in tractor and UV (utility vehicle) segments.

The stock has corrected around 17 percent in the past one month. The negative surprise in Q2 FY24 earnings accelerated the drop in the stock price. Consequent to the fall, Mahindra Finance’s stock is now trading at a reasonable valuation of 1.5 times the book estimated for FY25.

Surely, the valuation has moderated but that is not the only reason to consider the stock.  The more encouraging factor is the expected improvement in return ratios. We see the ROA (return on assets) improving gradually to 2.5 percent by FY25-26. What will drive the ROA expansion?

Lower credit cost

The negative surprise in Q2 FY24 earnings was the sharp jump in credit costs due to the one-off provisions. This was mainly on account of the delayed settlement in some product segments, including tractors, because of the monsoon deficit.

However, the same is expected to get reversed in the second half of the current fiscal (H2 FY24), driven by a higher recovery. There could also be a further decline in credit cost from the guided level (1.5-1.7 percent) in the coming fiscal with the new book building and past portfolios maturing.

Operating efficiency

Mahindra Finance is driving its transformation journey (Vision 2025 – Three-year road map) by adding new verticals and embracing technology to complement and strengthen its core business. The investment is expected to drive broad-based disbursements and the operating leverage will kick in as  asset growth accelerates.

Other catalysts

Festive season to drive healthy disbursement growth.  Higher asset growth can be expected in H2 FY24, backed by improved rural cash flow and better macro trends. Moreover, pre-owned vehicle financing will be a significant contributor to incremental growth amid rising prices of new vehicles after the festivals.

In a first, Mahindra Finance has forayed into the co-lending space with State Bank of India (SBI) , which will unlock the potential of priority sector lending. The strategic partnership will ensure a wider outreach and better interest rates for customers.

Overall, Mahindra Finance’s market leading position, strong rural distribution network and potential improvement in return ratios make the stock a worthy tactical pick.


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