PL Capital upgrades Mahindra Finance to 'Accumulate' from 'Hold'; check why

Brokerage firm PL Capital has turned positive on Mahindra & Mahindra Financial Services (MMFS), upgrading the stock to accumulate from hold on expectations of sustainable growth and a resilient margin profile over the medium term.

 

The brokerage expects credit costs to normalise by FY27 and FY28 while noting that weak asset quality and elevated near-term credit costs will weigh on profitability.

 

PL Capital has raised its valuation for MMFS’s standalone business to 1.6 times Sept’27E P/ABV from 1.3 times earlier. Its sum-of-the-parts valuation assigns ₹359 to the standalone entity and ₹16 to subsidiaries, and after applying a 25 per cent holding company discount, it has set a target price of ₹375 per share.

 

Here are the other key drivers behind the upgrade

Disbursements seen improving in H2FY26

While Q2 disbursements were modest at ₹135.1 crore, an increase of 3 per cent year-on-year, MMFS recorded a sharp 41 per cent year-on-year rise in tractor volumes and expects the momentum to continue in the second half. The company also indicated strong traction in PV demand after GST rationalisation, although much of this uptick is driven by premium and SUV customers, a segment MMFS does not meaningfully serve.

 

“Higher PV volumes, a favourable monsoon and recovery in rural demand for tractors are likely to drive growth over the near term. We expect AuM to grow 15 per cent and 14 per cent in FY26 and FY27,” said PL Capital.

Spread expected to stay resilient

MMFS aims to maintain spreads of around 7 per cent supported by an increasing share of high-yield segments such as tractors. Fee income rose to 1.4 per cent of average assets in Q2, with the company intensifying efforts across dividends, co-branded credit cards, FASTag partnerships, insurance distribution and TPAP licensing.

 

The company also recorded a 30 basis point improvement in CoF in Q2 and expects it to remain stable in the near term.

 

“We expect spreads to improve in FY27 supported by a favourable mix and lower CoF. On the opex side, the company continues to invest in AI and data analytics, having completed Phase 2 in November 2025, to enhance underwriting, customer service and collections,” the brokerage said.

Credit costs likely to ease from FY27 onwards

Gross Stage 3 and Net Stage 3 ratios stood at 3.94 per cent and 1.89 per cent respectively in Q2. The company highlighted an improvement in early delinquencies, with the GS2 plus GS3 ratio at 9.72 per cent, and guided for FY26 credit cost of 1.7 per cent compared to 2.0 per cent in H1FY26. MMFS will also revise its ECL methodology from Q3 to normalise provision coverage to around 45 per cent compared to 53 per cent currently.

 

“While we remain cautious on asset quality and build in a higher credit cost of 1.9 per cent for FY26, we expect it to normalise to 1.7 per cent and 1.6 per cent in FY27 and FY28,” said PL Capital. 

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