Project Udaan And Diversified Lending Will Improve Operational Efficiency

Key Takeaways

• Digital transformation and reduced collection costs through Project Udaan aim to improve operational efficiency and net margins.
  
• Strategic diversification in SME financing and high-margin segments to bolster revenue growth and profit margins.
  
• Challenging financial conditions with modest disbursement growth, compressing margins, higher credit costs, and asset quality risks may impact profitability and earnings.

Catalysts

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

• The company's Project Udaan is focused on digital transformation, including digital onboarding and collection stack journeys, which is expected to improve operational efficiencies and reduce non-cash collections, contributing to better net margins.
  
• A strategic focus on increasing fee-based income through corporate agency licenses and partnerships with 10 insurance companies is expected to enhance revenue streams and improve overall earnings.
  
• Expansion in the SME financing segment, which saw a 48% disbursement growth, signals a diversification strategy aimed at driving future revenue growth beyond traditional vehicle financing.
  
• The management expects a decrease in the cost of funds, aided by easing borrowing rates, which is anticipated to improve net interest margins (NIMs) going forward and positively affect earnings.
  
• The organization plans to leverage growth opportunities in high-margin segments such as tractor financing, which, coupled with improvements in asset quality metrics, is likely to bolster revenue growth and enhance net profit margins.

Mahindra & Mahindra Financial Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mahindra & Mahindra Financial Services's revenue will grow by 16.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.2% today to 28.1% in 3 years time.
• Analysts expect earnings to reach ₹35.8 billion (and earnings per share of ₹27.82) by about May 2028, up from ₹22.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹45.2 billion in earnings, and the most bearish expecting ₹27.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, up from 14.3x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.61%, as per the Simply Wall St company report.

Mahindra & Mahindra Financial Services Future Earnings Per Share Growth

Risks

• The company's disbursement growth has been mild to moderate, growing at only 2% and 3% for Q4 and the full year, which may negatively impact revenue growth.
  
• Net Interest Margins (NIMs) have compressed sequentially due to elevated costs of funds and marginal reductions in yields, which could impact net margins and overall profitability.
  
• The company faces challenges in its pre-owned vehicle business due to rebalancing risk appetite in certain segments, potentially affecting disbursement growth and earnings.
  
• The guidance for credit costs is set to be higher (1.3% to 1.7%), reflecting a need to provide adequately for potential future losses, which could affect net margins and profitability.
  
• The company is dealing with moderate asset quality improvements with the PCR only marginally improved to 51.2%, indicating a continued risk of stress in asset quality that could affect earnings.

Valuation

• The analysts have a consensus price target of ₹295.394 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 ₹350.0, and the most bearish reporting a price target of just ₹224.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹127.5 billion, earnings will come to ₹35.8 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 15.6%.
• Given the current share price of ₹262.05, the analyst price target of ₹295.39 is 11.3% 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.