Today, M&M Financial Services (MMFS) stock price rise 3% during intraday trading, despite a positive outlook presented in a report by Axis Capital.
In this report Axis Capital said that growth for M&M Financial Services (MMFS) is expected to remain subdued in the near term due to a slowdown in auto volumes, particularly in passenger vehicles and tractors, where MMFS has a strong presence. However, growth is projected to pick up in the second half of the year as the festive season begins.
The company’s assets under management (AUM) grew steadily by 23% year-on-year and 4% quarter-on-quarter in the first quarter of FY25. For the full fiscal year, AUM and disbursements are anticipated to increase by around 20% and 18% year-on-year, respectively. MMFS is also expanding its share in the used vehicle segment, which constituted 13% of AUM and 17% of disbursements in Q1FY25. Additionally, the company plans to enter the mortgage business, including housing loans, loan against property (LAP), and lease rental discounting (LRD), which will drive growth with more substantial and longer-term assets as the team gets established.
To address concerns around net interest margin (NIM), M&M Financial Services (MMFS) has raised lending rates, which should benefit the company. Its diversified borrowing mix has helped keep the cost of funds in check, with only a 10 basis point increase in the first half. With a fixed-rate loan portfolio, MMFS is also well-positioned to manage NIM in the event of a rate cut. The cost-to-income (C/I) ratio is around 41%, indicating potential for operating leverage as growth accelerates, which should improve return ratios. The company has obtained a corporate agency license from the Insurance Regulatory and Development Authority of India (IRDAI) to distribute insurance products and has partnered with six insurers, which should eventually enhance fee income.
AUM to see ~18% CAGR
The report projects a steady compound annual growth rate (CAGR) of 18% in assets under management (AUM) for M&M Financial Services (MMFS) over FY24-27E. This estimate does not include potential growth from the company’s planned expansion into the housing finance segment. The SME business is expected to be a major growth driver, while the company is also increasing its focus on pre-owned vehicles, which accounted for around 17% of total disbursements, amounting to ₹21.17 billion in Q1FY25. Additionally, the recent acquisition of an insurance license is anticipated to enhance fee income through the distribution of insurance products.
MMFS vs CIFC (vehicle finance)
A comparison of M&M Financial Services (MMFS) with Cholamandalam Investment & Finance Company (CIFC) in the vehicle finance segment for Q1FY25 shows that MMFS has significant business potential and could achieve better return ratios as growth accelerates. Currently, M&M Financial Services has lower yields compared to CIFC, but this is expected to improve as the share of used commercial vehicles (around 13% of AUM) increases. Additionally, MMFS has raised lending rates over the past two quarters, which should yield positive results in the second half of FY25.
With a cost-to-income (C/I) ratio of 41%, compared to CIFC’s 39%, MMFS has scope for operating leverage, which is likely to be realized in the second half of the fiscal year. Historically, the second half of the year is stronger for vehicle financiers, and MMFS is expected to report a return on assets (RoA) of approximately 1.9% for FY25.
