Rural Wheels Franchise And Asset Quality Improvements Will Drive Stronger Long Term Performance

Catalysts

About Mahindra & Mahindra Financial Services

Mahindra & Mahindra Financial Services is a leading rural and semi urban focused NBFC specializing in vehicle, tractor, SME and housing finance across India.

What are the underlying business or industry changes driving this perspective?

• Sustained momentum in the wheels franchise, particularly in tractors and passenger vehicles, positions the company to capture rising rural and small town demand. This supports double digit AUM growth and higher fee and interest income over the medium term, which should accelerate revenue and earnings.
• Expanding contribution from capital light, fee driven businesses such as insurance broking and other ancillary offerings is structurally lifting income by average assets without requiring commensurate balance sheet growth. This directly supports net interest margins and return on equity.
• Improving asset quality, reflected in lower GS2 plus GS3 levels and disciplined collections in historically challenging quarters, suggests structurally better portfolio behavior that can keep credit cost near the guided ceiling. This stabilizes net margins and enhances profit growth visibility.
• Strategic diversification into SME lending and a now cleaned up, profitable rural housing subsidiary creates new scalable growth vectors beyond core vehicle finance. This allows operating leverage on the existing distribution and underwriting platform, which should compound revenue and earnings faster than AUM.
• Favorable funding mix with a high share of floating rate borrowings, increased use of low cost instruments and recent equity infusion is reducing cost of funds and leverage. This provides headroom to protect pricing, support competitive growth and expand net interest margins, improving long term earnings power.

Assumptions

This narrative explores a more optimistic perspective on Mahindra & Mahindra Financial Services compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Mahindra & Mahindra Financial Services's revenue will grow by 20.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 28.5% today to 32.9% in 3 years time.
• The bullish analysts expect earnings to reach ₹49.8 billion (and earnings per share of ₹35.46) by about December 2028, up from ₹24.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹34.2 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, up from 19.5x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 24.0x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.02%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A structurally weaker commercial vehicle cycle, with management itself acknowledging that festive season momentum is not translating into similar strength in CV demand, could cap growth in a historically important asset class and weigh on long term disbursement volumes and revenue.
• Persistently high GS2 plus GS3 levels around 10 percent, concentrated in semi urban and rural self employed customers that are vulnerable to monsoon disruptions, unseasonal rains and regional agitations, risk normalizing credit costs above the 1.7 percent target and compressing net margins and earnings.
• Heavy reliance on vehicle finance in rural and small town markets, while SME and housing remain relatively small and recently turned around, exposes the company to any prolonged slowdown in rural cash flows or auto cycles, which could dampen asset under management growth, fee income scalability and medium term revenue.
• Use of floating rate borrowings against largely fixed rate lending, combined with increased use of short term instruments like commercial paper and TREPS, may shift from a tailwind to a headwind if the rate environment turns adverse, lifting cost of funds faster than yields and squeezing net interest margins and earnings power.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Mahindra & Mahindra Financial Services is ₹414.56, which represents up to two standard deviations above the consensus price target of ₹325.31. This valuation is based on what can be assumed as the expectations of Mahindra & Mahindra Financial Services's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹440.0, and the most bearish reporting a price target of just ₹225.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be ₹151.3 billion, earnings will come to ₹49.8 billion, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 16.0%.
  
• Given the current share price of ₹346.1, the analyst price target of ₹414.56 is 16.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.