Mahindra Finance Sinks to 52-Week Low Despite 55% Jump in Q2 Profit as Funding-Cost Worries Mount

A 55 per cent rise in quarterly profit was not enough to stop a sell-off in Mahindra & Mahindra Financial Services on Thursday. The stock fell nearly 10 per cent in intraday trade to Rs 268.25 on the NSE, its lowest level in 52 weeks. Investors looked past the headline number to what they saw as a weaker earnings mix and growing risks to margins.

By mid-morning the shares had recovered some ground and were trading about 5.5 per cent lower near Rs 283, with roughly 63 lakh shares changing hands on the NSE. The stock has now lost about 35 per cent from its 52-week high of Rs 415, hit on August 10.

What the numbers showed

For the September quarter (Q2 FY27), the non-banking lender's standalone net profit rose 55 per cent year on year to Rs 882 crore. Total income grew 15 per cent to Rs 5,175 crore. Assets under management rose 15 per cent from a year earlier and 7 per cent from the previous quarter. Tractors, SME loans, trade finance and mortgages led that growth.

The company is also slowly reducing its dependence on vehicle loans. Its wheels-to-non-wheels mix has moved to 80:20, a shift management has been pursuing to diversify a book that has long been tied to rural vehicle demand.

Why the market wasn't convinced

The problem is where the profit came from. Systematix Institutional Research, which started coverage on the stock with a Hold rating and a Rs 340 target, said reported profit came in about 4 per cent above its estimate but that the beat was driven by higher-than-expected other income, not core lending. Net interest margin, the gap between what the lender earns on loans and what it pays for funds, stayed flat at 7 per cent.

That margin is under threat. According to Systematix, 45 to 48 per cent of Mahindra Finance's borrowings are linked to floating rates. With the Reserve Bank having raised the repo rate this month and MPC minutes pointing to more hikes, the NBFC's funding costs are likely to rise. If it cannot pass those costs fully to borrowers, margins will shrink. Brokerages also flagged possible changes to rules on insurance distribution commissions, which have been a useful source of fee income for vehicle financiers.

The second concern is credit quality. The loan book is mostly rural, including exposure to states hit by drought this year. Weaker farm cash flows tend to show up first in tractor and two-wheeler repayments, which are the core of Mahindra Finance's business.

Not everyone is bearish

Opinion among analysts is split. Prabhudas Lilladher upgraded the stock to Buy from Accumulate with a target of Rs 350, arguing that a 16 per cent correction had already priced in much of the near-term margin pressure. Systematix also said it sees merit in the company's medium-term strategy of improving its product mix, raising yields and cutting operating costs.

Our take

The reaction shows how the market is now treating lenders with heavy floating-rate liabilities. In a rate-cutting cycle, Mahindra Finance's AUM growth and diversification would probably have been rewarded. In a tightening cycle, with crude above $110 and rural demand uncertain, investors care more about the quality of earnings than the size of them. At around 1.6 times estimated FY28 book value, the valuation Systematix used, the stock is no longer expensive. A re-rating will likely depend on margins holding steady for a few quarters, not on another strong profit print helped by one-off income. Thursday's slide also came on a weak day for the broader market, with the Sensex down more than 600 points at one stage.

This is an original summary based on public reporting. See our editorial policy for how we source, write, and correct our stories.