Buy Mahindra and Mahindra Financial Services; target of Rs 350: Prabhudas Lilladher

Key Investment Pillars

• Strong disbursement growth across wheels and non-wheels business, with 22% YoY growth in Q2 disbursements and 15% YoY growth in AUM, driven by broad-based growth across segments.
• Rising CoF to weigh on margins, with reported NIM moderating to 7.0% due to excess liquidity buffers and non-yielding trade advances, and limited pass-through of higher funding costs.
• Asset quality remains stable, with gross Stage 3/Net Stage 3 at 3.42%/1.51% and credit cost at 1.6%, although potential El Nino-related stress and drought conditions pose risks to rural demand.
• Fee income has improved through cross-selling and diversification, but proposed insurance commission regulations could weigh on income from corporate agency and MIBL.

Thesis Validation Checklist

• Monitor AUM growth and disbursement trends, particularly in the wheels and non-wheels segments.
• Watch for signs of margin pressure due to rising CoF and excess liquidity buffers.
• Track asset quality trends, including credit cost and Stage 3/Net Stage 3 ratios, and potential impact of El Nino-related stress.
• Observe fee income growth and potential impact of insurance commission regulations. Over the next 12 months, investors should watch for these observable signals to validate or challenge the analyst's thesis.