Target: ₹340

CMP: ₹298.45

Q1 core income was in line with estimates, but lower provisions led to M&M Financial Services’ earnings beat. On its strong parentage, healthy growth and potential for improvement, we retain our Buy rating.

Steady AUM growth, led by premiumization. Barring tractors, disbursements were healthy, which drove AUM up 23 per cent y-o-y, 4 per cent q-o-q. The share of pre-owned vehicles continued to improve (up 100bps y/y) to 13 per cent. SME finance grew faster than other products. We build in a modest 21 per cent loan CAGR over FY24-26.

Lower spread; to further improve. Spreads reduced 20bps sequentially on more prudent lending. Management aspires to operating income increasing as all products have seen upward repricing of rates. Besides, fee income is likely to pick up traction. Cost-income increased 58bps q/q to 50.01 per cent on subdued income. This is one of the core improvement areas for management.

Credit cost improves in a seasonally weak quarter. Asset quality improved, with GS3 at 3.6 per cent, 80bps lower q-o-q. Stress asset formation was 30 bps y-o-y lower at 6.1 per cent. Management expects asset quality to be stable. This, in a quarter when peer NBFCs are facing credit cost pressures.

Our TP of ₹340 is based on the two-stage DDM model. This implies about 1.9x and 1.7x P/BV multiples on FY25 and FY26.

Risks: Higher slippages, less-than-expected loan growth.