M&M Fin’s margin rebound must be accompanied by lower bad debts

Investors in Mahindra & Mahindra Financial Services Ltd (M&M Fin) can only hope that it can maximise the benefit of favourable macro tailwinds such as lower interest rates and improving liquidity in the system.

FY25 data shows the company meets 48% of its funding requirements from banks, and a bulk of it is likely to get repriced lower.

The management has also guided for net interest margin (NIM) to improve with some benefit trickling in from the decline in cost of funds even after factoring in some negative impact from floating rate assets. Lower cost of funds also improves the competitiveness of non-banking financial companies (NBFCs) versus banks.

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Conditions apply

However, for the full benefit to percolate to net profit, a tighter control on asset quality and lower bad debt costs will be needed. The company’s stage 3 loans (similar to NPA norms for banks) have risen to 3.7% as on March 2025 from 3.4% a year ago and provision coverage ratio on these loans has fallen to 51.2% from 63.2%. The implication of these two factors could mean higher provisioning in the future, hurting profitability.

M&M Fin’s net interest income (NII) was up 6.4% on-year to ₹1,927 crore in Q4FY25. Net profit fell 9.3% to ₹562 crore as bad debt costs soared 34%.

The company remains a play on vehicle financing, focusing on the prime segment (loans offered to borrowers with strong creditworthiness) that formed nearly 91% of its loan book. The overdependence on vehicle loans meant that disbursement grew by just 3% in FY25 as slackness in new and used vehicle loans hurt. The demand for commercial vehicle financing was affected by weak freight rates.

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The management is banking on tractor financing and recently launched electric vehicles of Mahindra & Mahindra Ltd to boost lending book. The long-run goal is to reduce the dependence on vehicle loans, bringing the contribution down to 75% over the next three to five years.

Meanwhile, M&M Fin has fallen way short of its target for the crucial metric return on average assets (ROAA). It came in at 1.9% for FY25, lower than the target set at 2.5% in April 2022.

The Street has noted this, taking the stock down 3% to ₹269 on Wednesday. Nomura and Kotak Institutional Equities have lowered their earnings estimates for FY26 and FY27 to account for higher bad debt costs. Only a sustained improvement in asset quality and a rebound in growth rate would bring back investor interest in the stock.

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