Mahindra Finance sees healthy asset quality as funding and drought risks persist

Investment View and Valuation

Emkay Research’s October 22, 2026 result update on Mahindra Finance retained its BUY recommendation following a healthy 2QFY27, while reducing the September 2027 target price to Rs 370 from Rs 410. The revised target implies 24.2 per cent upside from the CMP of Rs 298 and values the stock at 1.7 times FY28E price to adjusted book value.

Emkay reduced its FY27E to FY29E EPS estimates by 1 to 2 per cent because of rising cost of funds, potential insurance-commission regulation and drought-related collection risk.

2QFY27 Financial Performance

Mahindra Finance reported 2QFY27 PAT of Rs 8,815 million, up 54.8 per cent year on year and down 1.9 per cent quarter on quarter. PAT was 2.2 per cent below Emkay’s estimate but 3.7 per cent above consensus.

Business assets increased 15.1 per cent year on year and 6.6 per cent quarter on quarter. Disbursements were supported by broad-based growth and strong momentum in non-wheels.

Asset Quality and Credit Costs

Asset quality was a key positive. GS3 improved by 52 basis points year on year to 3.42 per cent, while NS3 declined by 38 basis points to 1.51 per cent. GS2 plus GS3 reached a multiyear low of 8.1 per cent, and provision coverage stood at 56.6 per cent.

Credit cost on average business assets was 1.77 per cent, compared with 2.41 per cent in 2QFY26 and 1.68 per cent in 1QFY27. Management considers the existing overlays of Rs 8,520 million sufficient for external stress and does not currently expect to build more.

Margins and Funding

Margins remain an important watchpoint. NIM was 7.0 per cent in 2QFY27, flat year on year but around 30 basis points lower quarter on quarter because of excess liquidity and seasonal trade advances. Higher fee income and stable cost of funds partly offset the margin pressure, keeping first-half margin at 7.1 per cent and in line with guidance.

Management expects the liquidity and trade-advance drag to ease. However, around 48 per cent of borrowings are floating rate, largely linked to repo and Treasury bill rates, and approximately Rs 270 billion of borrowings mature over the following six months. The largely fixed-rate wheels book can be repriced mainly through new loans.

Management intends to protect margins through faster repricing in non-wheels, higher pricing on new self-employed and agri wheels loans, PSL asset sell-down through on-lending and securitisation, and processing and late-payment fee levers.

Growth Outlook and Management Guidance

Management retained its medium-to-long-term guidance for 16 to 18 per cent AUM growth, GS2 plus GS3 below 10 per cent, credit cost of 1.3 to 1.7 per cent, NIM above approximately 7 per cent and ROA of 2.2 to 2.5 per cent.

Wheels is expected to grow slightly ahead of the industry, while SME, personal loans and mortgages should drive incremental growth. Mortgages may dilute ROA initially, but the MRHFL merger is expected to eliminate duplication across approximately 400 MRHFL branches and 1,400 Mahindra Finance branches.

AI-orchestrated disbursements reached Rs 16,600 million, mainly in top-up and used-vehicle loans and personal loans. These disbursements had lower acquisition cost, with no early asset-quality difference identified.

Key Risks and Near-Term Developments

Risks highlighted by Emkay and management include higher funding costs, draft insurance-commission norms that could materially affect MIBL motor third-party and own-damage income, and drought-related tractor collection stress.

• Mahindra Finance has stepped up collections with approximately 9,000 collection officers and reduced lending in stressed pockets.
• Early Navratri sales and loan volumes were below the prior year, particularly for tractors. Management noted that the previous year’s comparison was unusually high after demand had been deferred ahead of a GST cut.
• Emkay expects the usual second-half seasonal improvement in credit cost to be muted because first-half stress was already contained.