A poor Q2FY24 performance causes shares of Mahindra & Mahindra Financial Services to drop 14.40%

 A poor Q2FY24 performance causes shares of Mahindra & Mahindra Financial Services to drop 14.40%

Investors' negative reaction to the company's Q2FY24 performance, which was released after market hours on Friday, caused shares of Mahindra & Mahindra Financial Services (MMFS), a division of the Mahindra Group, to plummet 14.40% to reach 237.35 apiece in early trade on Monday, a level not observed since April 2023.  The stock was trading at ₹251.30, having dropped 9.45% as of 10:45 AM. 

Provision reversals were the main cause of the company's Q2FY24 48% decline in standalone net profit to ₹235 crore. By contrast, the PAT for the same time in the previous year was ₹448 crore, and for the June quarter of last year (Q1FY24), it was ₹362 crore.

The firm recorded a 9.2% YoY increase in PPoP (pre-provision operating profit) of ₹942.8 crore in Q2FY24, while the net interest revenue reached ₹1,674 crore, indicating a 9% YoY gain. Yields moderated at 35 basis points QoQ throughout the quarter, while CoF increased by 10 basis points. As a result, NIM contracted by 45 basis points QoQ.

"Yield moderation can be credited to a rising proportion of PrimeX customers, increased demand in lower-yielding utility vehicles, so no interest rate hike on incremental lending," remarked Motilal Oswal, a local stockbroker.

"NIMs compression due to increased CoB is a wide narrative however, Mahindra Finance experienced twin challenges: yield constriction (upgrade to a better customer segment as well as a high proportion of interest-free advances this quarter) as well as rising CoB," Centrum Broking, a brokerage, said.

Centrum Broking claims that the company's credit expenses surged in the second quarter, mostly as a consequence of higher provisions and write-offs brought on by difficulties in the tractor market brought on by the unpredictable monsoon.

After the Q2 results, the price of RIL shares increases by 2%, and leading brokerages maintain their positive outlook on the company.

Assets under management (AUM) continues to rise steadily, according to the brokerage. It does draw attention to the uncertainty surrounding the conversion of this increase into profitability.

"2H is expected to be better as administration has initiated yield hike in certain investment portfolios and a large chunk of dealer financing is anticipated to be converted into yield-earning assets, recovery have been historically more accurate in 2H, which may reflect in lower credit costs; however, opex might continue to be elevated," stated Centrum Broking.

In light of the Q2FY24 performance of the firm, Centrum Broking reduced its rating of the stock to 'Accumulate' and set a target price of ₹302 per share. Conversely, Motilal Oswal maintained its recommendation to "buy" the stock, setting a target price of ₹330 per share.

Brokerages lower target prices after Q2 data, causing the price of SBI Card shares to fall by nearly 7%.

According to Motilal Oswal, up until the last two quarters, the business has been able to lower volatility in its net income and profits performance via improved risk management and operational streamlining. NIM volatility and high credit costs have already been recorded by MMFS for two quarters in a row (despite slight improvements in asset quality).

Investor confidence in its transformation process may be impacted by the persistent volatility seen in NIM and credit costs. But according to the brokerage, MMFS should witness increases in NIM and a slowdown in loan costs in 2HFY24.