EV Partnerships And Digital Investments Will Improve Future Profitability

Key Takeaways

• Strategic partnerships and SME growth could expand revenue, while embracing the EV sector enhances market participation.
  
• Digital investments and focus on asset quality may reduce costs and protect earnings, boosting net margins.
  
• Challenges in asset quality, reliance on inconsistent revenue streams, and rising costs may pressure Mahindra & Mahindra Financial Services' profitability and capital adequacy.

Catalysts

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

• The company's significant growth in SME disbursements, with a 60% year-over-year increase, indicates robust diversification efforts, likely enhancing future revenue streams.
  
• Strategic lending partnerships, such as the exclusive agreement with Mahindra for new EVs, may bolster future revenue through expanded market participation in the growing EV sector.
  
• The focus on fee-based income, through initiatives like co-branded credit cards with RBL Bank and insurance distribution, could improve net margins by adding higher-margin revenue sources.
  
• Continued investment in digital tools and cloud applications promises operational efficiencies, which may reduce OpEx and potentially boost net margins over time.
  
• The focus on asset quality management, particularly efforts to keep GS3 levels stable, aims to control credit costs and protect future earnings.

Mahindra & Mahindra Financial Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mahindra & Mahindra Financial Services's revenue will grow by 16.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.0% today to 29.2% in 3 years time.
• Analysts expect earnings to reach ₹36.8 billion (and earnings per share of ₹31.66) by about January 2028, up from ₹24.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹40.5 billion in earnings, and the most bearish expecting ₹26.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, up from 13.5x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 2.02% 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

• Operating in an environment with challenges could pressure asset quality, affecting future earnings.
  
• Exposure to seasonality and reliance on specific segments such as farm equipment, which can provide inconsistent revenue streams.
  
• Potential increase in provisioning requirements due to upward trending probability of default could impact net margins.
  
• Dependence on interest income and rising cost of funds might squeeze net interest margins, affecting overall profitability.
  
• Capital adequacy concerns may lead to the need for capital infusion, diluting equity and possibly affecting earnings per share.

Valuation

• The analysts have a consensus price target of ₹297.82 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 ₹232.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹126.0 billion, earnings will come to ₹36.8 billion, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 16.0%.
  
• Given the current share price of ₹270.0, the analyst's price target of ₹297.82 is 9.3% 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.