Mahindra Finance Rated as “Reduce” with Target Price of Rs 270 by Emkay Global Financial

Emkay Global Financial has given a “reduce” rating for Mahindra Finance, setting a target price of Rs 270 in their research report dated October 3, 2024.

Recently, Emkay met with Raul Rebello (MD & CEO) and Vivek Karve (CFO) of Mahindra Finance to discuss the company’s strategy and recent developments in the industry. Here are the key takeaways from that meeting:

1. Diversification Strategy: Mahindra Finance is gradually expanding into mortgages and MSME (Micro, Small, and Medium Enterprises) lending. This move aims to complement its vehicle finance business and capture a larger share of the retail lending market.
2. Focus on Risk Management: The company is prioritizing risk management in its underwriting and collections processes, which has led to significant improvements in asset quality. This change is helping to stabilize earnings and reduce volatility.
3. Improvement in Return on Assets (RoA): The RoA has improved from 2.2% to a target of 2.5%. This improvement will be supported by higher fees from loans and cross-selling, as well as better management of funds to reduce costs.

Overall, the management appears to have a solid strategy and the necessary resources to achieve profitable growth with reduced volatility. Mahindra Finance is expected to benefit from favorable conditions, such as good monsoon seasons that drive rural and agricultural recovery. Emkay plans to review its estimates, rating, and target price of Rs 270 per share (for June 2025) in the near future.

Expansion into New Lending Opportunities

In recent years, Mahindra Finance has reduced its reliance on captive financing, which now represents only about 42% of its business. To mitigate cyclicality, the company is diversifying into mortgages and increasing its focus on MSME lending. It has recently announced plans to expand into the mortgage sector, offering home loans, loans against property, and lease rental discounting, alongside its existing SME loans targeting micro enterprises. This new housing initiative aims for broader coverage compared to its subsidiary, which focuses on micro rural home loans.

Focus on Fee Income and Cost Management

To reach its medium-term goal of 2.5% RoA (after achieving 2.2% RoA soon), Mahindra Finance is concentrating on several key operational metrics, including net interest margin, fee-based income, operational expenses, and credit costs. Improvements in RoA will be driven by:

1. Increased fee income from loans and cross-selling.
2. Active treasury management to optimize borrowing costs.
3. Anticipated operating leverage in the medium term, despite some current expenses remaining high due to investments in growth.
4. A better customer profile and product mix to maintain lower credit costs.

Execution Will Be Key to Future Growth

The management’s plan to create a diverse lending business for predictable and profitable growth appears credible. They have the right resources, including skilled personnel and a strong parent company, to execute their plans. However, executing this strategy will face challenges, and improvements in RoA will take time, especially with the higher expenses related to the new mortgage business.

In conclusion, while Emkay is impressed with Mahindra Finance’s vision and believes the strategy is on the right track, the company’s shares may not see a re-rating until it meets its strategic goals. Currently, Emkay maintains a “reduce” rating on the stock with a target price of Rs 270 per share, as the current profitability is deemed below expectations. They plan to review their estimates and rating soon.