Decisive Co-Lending With SBI And Diversification Into Mortgages And Insurance Will Enhance Net Margins And Drive Robust Earnings Growth

Key Takeaways

• Efforts to improve asset quality and operational efficiency are poised to enhance margins and bolster earnings.
  
• Diversification through new product lines and co-lending partnerships promises substantial revenue growth and improved asset utilization.
  
• Asset quality issues and rising credit costs in key segments could limit revenue growth and compress net interest margins, impairing overall profitability.

Catalysts

A non-banking financial company, provides financial services in the rural and semi-urban areas in India.

• Mahindra & Mahindra Financial Services is actively working on improving asset quality, with expectations of lowering GS3 and credit costs. This focus is likely to reduce provisioning expenses, positively impacting net margins and earnings.
  
• The company plans significant growth in new mortgages and the insurance agency business, which are expected to drive higher revenue through diversification into these new product lines.
  
• Mahindra Finance is targeting operational efficiencies, having seen a reduction in operating expenses as a percentage of income. Continued focus here will likely improve net margins over time.
  
• Co-lending partnerships, such as those with SBI, are likely to provide substantial growth in loan disbursements, particularly in segments like PV and CV, enhancing revenue streams in the medium term.
  
• With a strategic focus on lending to prime segments and product diversification, the company aims to improve its ROA up to 2% by FY '25, driving a boost in earnings through optimized asset utilization.

Mahindra & Mahindra Financial Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mahindra & Mahindra Financial Services's revenue will grow by 17.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.6% today to 29.3% in 3 years time.
• Analysts expect earnings to reach ₹36.3 billion (and earnings per share of ₹29.24) by about December 2027, up from ₹21.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹27.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2027 earnings, up from 15.4x today. This future PE is greater than the current PE for the IN Consumer Finance industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.01%, as per the Simply Wall St company report.

Mahindra & Mahindra Financial Services Future Earnings Per Share Growth

Risks

• The increase in Gross Stage 3 (GS3) numbers to 3.8%, influenced significantly by the tractor segment, suggests asset quality issues that could elevate future credit costs and impact net earnings.
  
• The expectation of credit costs being in the range of 1.3% to 1.5% depends heavily on future recoveries, which is uncertain, potentially affecting net margins if recoveries do not materialize as anticipated.
  
• Flat or declining disbursement growth across key segments such as personal vehicles and commercial vehicles, along with a notable slowdown in the demand environment, could limit future revenue growth prospects.
  
• Rising cost of funds with limited ability to pass on these costs to lending rates could compress net interest margins, affecting overall profitability.
  
• The rural housing book continues to exhibit high GNPA levels, and organizational restructuring without immediate growth focus may not enhance revenue or asset quality in the short term.

Valuation

• The analysts have a consensus price target of ₹301.88 for Mahindra & Mahindra Financial Services based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹360.0, and the most bearish reporting a price target of just ₹235.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹123.9 billion, earnings will come to ₹36.3 billion, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 16.0%.
  
• Given the current share price of ₹272.05, the analyst's price target of ₹301.88 is 9.9% 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.