Mahindra Finance diversification and lower credit costs support stronger FY27 earnings

Investment View and Valuation

In its July 22, 2026 results update, Motilal Oswal Financial Services Limited (MOFSL) retained its Buy rating on Mahindra & Mahindra Financial (MMFS), citing strong 1QFY27 earnings, lower credit costs, operating-cost discipline and early traction in diversification beyond the wheels franchise. The broker’s target price is Rs 405, based on 1.8 times March 2028 estimated book value, compared with the current market price of Rs 350.

Strong 1QFY27 Earnings and Cost Discipline

MMFS reported 1QFY27 profit after tax of about Rs 900 crore, up about 70 per cent year on year and around 20 per cent above MOFSL’s estimate. Net interest income was Rs 2,413 crore, up about 20 per cent year on year and in line with estimates. Other income increased about 29 per cent year on year to about Rs 353 crore, supported by higher dividend and fee income.

Operating expenses were about Rs 1,010 crore, up about 8 per cent year on year, while the cost-to-income ratio improved by about 430 basis points year on year to about 36.5 per cent. Pre-provision operating profit grew about 30 per cent year on year to about Rs 1,756 crore and was in line with estimates. Credit costs of about Rs 570 crore were around 20 per cent below MOFSL’s estimate; annualised credit costs were about 1.7 per cent, versus 2.2 per cent a year earlier.

AUM Growth and Diversification Beyond Wheels

Business assets stood at about Rs 1.37 lakh crore in 1QFY27, increasing about 13 per cent year on year and about 2 per cent sequentially. Disbursements were about Rs 15,600 crore, up about 22 per cent year on year but down about 10 per cent sequentially.

Growth was broad-based across key segments. Tractor disbursements grew about 45 per cent year on year, SME disbursements about 30 per cent, passenger-vehicle disbursements about 24 per cent and pre-owned vehicle disbursements 16 per cent. MOFSL believes diversification across customer segments can reduce the seasonal and cyclical volatility associated with wheel-based lending. It forecasts an AUM compound annual growth rate of about 14 per cent over FY26 to FY28.

Asset Quality Remains Broadly Stable

Asset quality remained broadly stable during the quarter. Gross Stage 3 and net Stage 3 increased about 4 basis points sequentially to 3.45 per cent and 1.48 per cent, respectively. Stage 3 provision coverage declined 50 basis points sequentially to 58.1 per cent.

Stage 2 increased about 10 basis points sequentially to about 4.9 per cent, with Stage 2 provision coverage down about 20 basis points to about 7.8 per cent. Write-offs were about Rs 480 crore, or 1.6 per cent of trailing twelve-month exposure at default, while net slippages into Stage 3 were Rs 640 crore against Rs 700 crore a year earlier.

Collection efficiency was about 95 per cent, compared with 98 per cent in the preceding quarter. MOFSL notes that 30-plus days past due is at a multi-year low and that management overlays established in 2HFY26 provide protection against macroeconomic or monsoon-related headwinds.

Near-Term Margin Pressure

Margins faced near-term pressure. Calculated loan yields were stable at about 14 per cent, but the cost of funds increased about 10 basis points sequentially to 7.1 per cent. Consequently, spreads declined about 10 basis points to 6.9 per cent and calculated net interest margin declined about 15 basis points sequentially to about 7.1 per cent.

Management expects product-mix optimisation, calibrated pricing, higher fee income and normalisation of excess liquidity to support margins. MOFSL models net interest margin of about 7 per cent in both FY27E and FY28E.

Management’s Five-Year Growth Strategy

Management reiterated its target of about 16-18 per cent AUM compound annual growth over the next five years, led by approximately 11-12 per cent growth in wheels and about 30 per cent growth in newer businesses.

Mortgages, SME, leasing and other non-wheel businesses are being supported by investments in leadership, products, distribution and new markets. Management said housing finance is now delivering strong profitability, while insurance broking and asset management are scaling. It also plans to reduce commercial-vehicle exposure to fleet operators because of stronger bank competition.

Management Guidance

• Through-cycle credit costs of about 1.3-1.7 per cent.
• Cost of funds stable within plus or minus 10 basis points.
• Operating expenses to average assets of about 2.5-2.7 per cent.
• Long-term return on assets aspiration of about 2.5 per cent.
• No expected need for equity capital over the next six to eight quarters.

Earnings Estimates and Key Thesis Variables

MOFSL raised FY27E and FY28E profit after tax estimates by about 5 per cent and 4 per cent, respectively, reflecting lower provisions and operating expenses. It estimates FY26-FY28 AUM and profit after tax compound annual growth of about 14 per cent and 23 per cent, respectively.

Key variables for the thesis include the pace of non-wheel scaling, continued asset-quality resilience, normalisation of liquidity and borrowing costs, and the ability to offset wheel-business seasonality and commercial-vehicle competition.