Mahindra & Mahindra Financial Services Limited (NSE: M&MFIN) Q3 2026 Earnings Call dated Jan. 28, 2026
Corporate Participants:
Unidentified Speaker
Raul Ignatius Rebello — Chief Executive Officer
Pradeep Kumar Agrawal — Chief Financial Officer
Analysts:
Unidentified Participant
Abhijit Tibrewal — Analyst
Viral Shah — Analyst
Piran Engineer — Analyst
Presentation:
operator
Ladies and gentlemen, good day and welcome to Mahindra and Mahindra Financial Services limited QT Earning conference call hosted by Kotak Institutional Equities. As a reminder, all participant line will be the listen only mode. And there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchdown phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nishind Chavat from Kotak Institutional Equities. Thank you. And over to you, sir.
Unidentified Speaker
Good evening everyone. Welcome to the interaction with management of Mahindra and Mahindra Financial Services. We will discuss CQFY 26 earnings today. Let me welcome the senior management, Microfinance, represented by Mr. Raul Rebello, Managing Director and Chief Executive Officer. Mr. Pradeep Agarwal, Chief Financial Officer and Mr. Sandeep Mandrekar, Chief Business Officer, Wheels. I would now like to hand over the call to Raul for his opening comments. After which we’ll take the Q&As.
Raul Ignatius Rebello — Chief Executive Officer
Yeah. Thank you Nishant, for hosting us and the Kodak team. Good evening everybody and thank you for joining us on our Q3 earnings call. Apologies for a slightly delayed upload of the deck on the exchanges. I hope you’ve got access to it. So as usual I would request you to keep the deck handy because I’ll be referring to certain page numbers as we progress for updates on Q3. Starting up on page number four. I have broadly four key messages before I get into the details of financials. Number one, we are happy to convey that a lot of the capability building that the management has been driving for the last couple of years through our business transformation project called udan.
I’m happy to say that we have completed this and this is now starting to bear very strong outcomes. Whether it’s on the customer front, on the dealer front and you know, just from pure efficiencies from our executives. The second message is we are seeing and what we would think is a description of this quarter is a visible step up in our profitability for Q3 and nine months of the financial year. We are also seeing further stabilization in asset quality. Evidence that our gross stage three has been sub 4% now for the last eight quarters. And as we had also mentioned, we were keen to keep GS2 plus GS3 below 10%.
And that’s also playing out now for the last eight quarters. Finally, considering that we think and observe that with the capabilities built and with the operating Metrics Progressing in the right Direction it is the right time for us to pivot to growth. We have been making investments largely on products, channels, systems and earlier in the year we had a rights issue. So this is the right time for us to pivot to growth and I will during the course of my presentation share with you our plans on amplifying growth as we go ahead. Moving on to page number five.
As I mentioned, we believe that the business transformation now is complete. It is evidenced clearly that 95% of our channels have adopted the new stack. This is resulting in both acquisition and collections now at a very strong pace. On the new stack we have sunset all our old Los LMS tech infrastructure which means our associates are now onboarding clients completely paperless. Our branches have now been kind of re equipped to do multi product and omnichannel journeys and our two back offices, the CPCs have also got AI fied in a way to look to use the best tools for improving on efficiency.
Moving to Quarter three visible step up that we have seen in profitability. If you look at the quarter three ROA we have climbed to 2.5 now. There have been one time benefits in this quarter. If you look at nine months of FY26 our ROA is moved up to 1.9%. You would all recollect that as a from the business model kind of metrics that we were keen to get the movement. We said we are keen to hit a 2% ROE and then sequentially climb up from there. I do think we are moving in that direction. Quarter on quarter the pat numbers for Q3 if you look at a sequential growth it has come in at a 59% growth.
Nine months for FY26 PAT is up 76%. This is of course adjusting for what you are all aware. We do the model refresh in Q3 of every year. Last year we saw a kind of PCR cover fall from 60 odd to 50% coverage ratio. So it’s not a comparable YOY and hence we have done a Q on Q comparison and Pat is up 59%. The story on NIMS is also quite encouraging. If we look at quarter on quarter NIM expansion we have seen a 50bps expansion in NIM. 7.5 does have some one time benefits. I would request you to read the nine month financial year 26 NIM which has come up to 7.1%.
All of you would be aware that this is one of the metrics we have been talking about that the NIMS which had bottomed out at 6.5% we clearly said that we are looking at getting back to seven and then from there on inching up. So it’s good to see NIMS for nine months climb to 7.1 which is comparable to 6.69 months of last fiscal. Overall. What is structurally also improving is our fee income. Fee and other income has expanded Q on Q by 10bps and nine months for the financial year to 1.4% versus 1.1 for nine months of last fiscal.
Moving to page number seven which talks about our further stabilization on asset quality, GST numbers for quarter three are at 3.8%. This is sequentially down 14bps and YOY down 13bps. As I mentioned in the opening comments, GS3 +GS2 together is 101bps lower than last year same time at 9.2 and credit cost for the quarter is 1.39 months credit cost is at 1.8%. You would all recollect that for the business model that we said which requires us to get back to a 2% ROA, credit cost should be in the range of 1.5 to 1.7 YTD we are at 1.8.
We do see capability for us to live up to that commitment of being within that zip code of 1.5 to 1.7. Finally, as every year in Q3 we do the ECL refresh. We did a ECL refresh this year. It said this year to it and we have largely now in house the model while there has been LGD resets and which kind of caused us to have a slightly lower pcr. But we are not taking any PCR benefits from the ECL model into the pnl. We are keeping an overlay. The overlay details I will spell out later.
It’s about 635 odd crores on a high level. The PCR cover which was in the zip of 53% in Q2 has been maintained at 53% for for Q3. Also request you to move now to page number 8. So what does pivoting to growth mean for us while investments are in place for a rural player like us and with the GST benefits we did in our quarter call of Q2 talk about certain momentum that is building up with the GST cuts. From a disbursement standpoint Q3 has been the highest. What we delivered in Q3 of this fiscal has been a highest ever Q3.
So we did catch momentum of the GST benefits. Of course most of these benefits for us has Been I would say enjoyed. With the tractor disbursement growth which is up 65%. We have had unit growth in PVCV but but as you know the ticket sizes had to get readjusted because of the price of the vehicles so we couldn’t see that translate to equal benefits in the disbursement numbers. While we saw reasonable growth in PV and cv, the real standout growth for the quarter was in tractors. I don’t know whether you guys caught the update that in our diversification plan.
We have been sharing this for a while now. Our subsidiary, our 100% sub MRHSL for the last year now we have been focusing on streamlining the asset quality in that business. I’m happy to share that for last two quarters that business is now shaping up well. We are holding the asset quality well. We did of course bring the GS3 below 3%. We have taken to both the boards today a plan to look at what’s the best way to do mortgages going ahead which includes an evaluation of merging the two entities. We are going to do a full evaluation and take the final suggestion to the boards in due course of time.
So mortgages is going to be an important asset category for us to double click on and doing it in a manner which makes sense from a cost efficient manner is also equally important for us to get to the ROA outcomes. In line with our diversification. The MSME business now is also touching close to 8000 odd crores. We are seeing an AUM growth yoy of course because it is a small base. We have much much more prolific plans for the SME business growth and it’s early days yet for us to see true potential of that playing out.
I mentioned in past calls it’s still capability building and channel investments that we’re doing for the business right now to grow. Of course capital is important and we are extremely well capitalized. Our tire one still is at 17.4. So all the growth plans that we have are supported by a very strong capital adequacy. I’ll now get into details about disbursement spreads and risk. So moving to page number 10 you might be interested to know where we got our disbursement growth from on a yoy basis. Traktor has been standout. We have mentioned this in the past.
While a lot of our peers claim to be number one in tractor finance I request you to look at all everyone’s book numbers and disbursement numbers. We have by far increased our leadership position. We are the number One tractor financer in the country by a fair margin. Now with this increase we have got in Q3, I think the jaw has even widened between us and the second best or the second financer on the leaderboard. Used vehicle also grew. But we have been cautious in this growth considering the new vehicle numbers. Passenger vehicle growth while quarter on quarter is higher 33% YoY is just 1%.
As I mentioned, there’s been a ticket size decrease here. We have got unit growth but not equally high disbursement growth because we have kept the LTVs at the previous level. CV growth while unit has growth. But a lot of our movement has been towards the ticket sizes where we were again conservative on LTVs. So we haven’t got disbursement growth but unit growth has happened in the quarter three wheelers. We continue to move towards more EV three wheeler business because we think that’s the future in the three wheeler business. So we are a little more conservative on the other combustion engines and focusing on the electric three wheelers and SME.
While we had a YoY growth of 4% overall YoY growth in AUM is much stronger. So highlight message on page number 10 is we have grown disbursement 7%. I would say the YOY growth in unit is much higher than 7% quarter on quarter. You are saying that because of course Q2 was a bit bleak. It’s a 30% growth quarter on quarter. Many of you have asked us this in the past. Why is the quarter on quarter growth in book being only 1% if the disbursement growth has been high? I would like to clarify in quarter two we have a very decent size of what we call a trade advance which is to facilitate the season disbursement that is not interest bearing.
That also has a benefit as we go into the names of Q3, but since that is not counted in disbursement, it is counted in book. So because that gets translated into, you know, adjusted into book growth. You see that 37 in the. In the last column you see a degrowth in the QOQ book growth. Otherwise adjusted for that, it’s a 5% book growth quarter on quarter. Now coming to the overall ROA tree, this in a sense gives us what’s moving. What are the levers that the management has been invested in to move the ROA tree? If you look right on top on the total income by average assets on the nine months for FY26 there’s been a 20bps growth, fair to say in a declining interest Environment we are going to see intensified competition which will mean as we as cost of funds go down, we’ll have to pass on some benefits.
You know, the competition intensity is quite acute so we will have to be competitive. And what we have seen so far, the 20 pips decline in the loan income. However, with our investments in augmenting fee based income, we have been more than able to offset this loan income decrease of 20 pips by 30 pips increase in fee investment income which has grown from 1.1 to 1.4. As we also mentioned that some of our subs, especially MIBL and many of you asked whether it’s a one time dividend payout that comes into this fee income. We said no, this is structural, that business is a cash generating entity.
We will continue to enjoy regular dividend payout from that entity which will keep augmenting our fee based income. Our interest cost. Yes, not comparable to last year exactly because the rights issue was done this year. So we do have some of the debt equity play at work here. But we are seeing incremental cough coming in at a good level, at a good interest level. So COF is also a metric and hence if you look at, I request you not to look at Q on Q but nine months of this year versus last year we have still seen a NIM expansion of 50bps.
Opex has been largely range bound. We are investing, as I said, in new businesses and growth. So we do believe our business franchise can absorb between 2 to 2.5 2.8% opex to average assets. I’d like to spend some time on credit cost here but move to page number. I’ll kind of COVID my commentary on asset quality through page number 12 and 13 together. The highlight on page number 12 as you would see is our collection teams have done a phenomenal job. The GS3 numbers have reduced quarter on quarter by 14 bips. You know, same time last year we actually increased by 10bps.
But there is a qualification here we also have enjoyed. We have basically written off, you know, from our earlier fully provided portfolio of the IAS wall incident that happened. We had 100% provided for that. As you know, it’s in litigation and whatever recoveries are going into a quote account. So we have decided to completely what we have provided for, write that off. That’s another 10bps. So net net we have still seen a 4bps reduction in GS3. The real positive story is in GS2 which has seen a 38bps reduction Q1Q which means that you know GS2 plus GS3 has reduced by 52bps sequentially quarter on quarter to the next page.
I’m. Going to explain credit cost here but you know I do acknowledge that the credit cost could be a little confusing because of the amount of PCR that happens. So maybe the better explanation is on page number 14. If you look at credit cost for the quarter, you know credit cost is a combination of provisions and end losses. So provisions because we wrote off the amount of 146 crores that’s moved out from provisions. But yes, that gets added back into the write off. So we have circled that the 146 that you see interplay between A3 and B1.
The real credit cost for the quarter would be the last row which is reading as 482 crores because that adjusts for all the movement in the PCR cover that happens in between the quarters as well as the offset between write off and the one time write off and the subsequent provision. So in our mind we have adjusting for this provision movement the real credit cost which one would read which was 623 crores for quarter two of FY26 has reduced to 482 crores for quarter three. The same number was 592 crores for quarter three of 25.
I’m happy to take more questions of this during the Q and A session. Quarter three usually gets a bit because we do the ECL refresh. You have movements in PCR but just stock movement. There is of course stock movement and then there is coverage movement. The good news is for credit costs on stock movement we have reduced the stock on GS2 and GS3 and hence there’s a benefit. But we have not taken any benefit of the PCR which ideally with the ECL refresh has caused a reduction in pcr. We have created an overlay as I mentioned earlier which we can talk about in more details.
Finally my last page on page number 17. What is a constant for the management team that keeps us focused on to deliver very strong operating and financial metrics? These are the top five priorities that the company is chasing for now we do understand our business moat is our wheels business. There is a leadership position that we enjoy in various categories in the wheels business and that being our crown jewel, we are defending and growing our moat in this business. And we do understand that as competition intensity increases we have to keep working on making sure our market shares hold as a growing franchise.
Clearly the objective is not to be monoline to make sure that we are meaningfully diversifying. We are growing our adjacent businesses which we call as SME and the housing finance business. We do believe the turnaround in MRFHL is complete now and now it’s time for us to look at a unified approach in growing the mortgage business. So that will also be a continued focus for the company. The growth in margins as we our names did come under some challenge. We knew we had to balance between growth and margins. We have taken certain calls even in the wheels business on how we participate with the kind of mix now and tractor becoming a larger part of the portfolio mix and also us balancing our play in the passenger vehicle business.
We’re not just growing just to catch tailwinds of growth in the prime segment. We are making sure that any growth that we do in the wheels business balances for our margin and growth objectives. That’s seeing a visible improvement in our nims. We do take courage from the way in which our GS3 numbers, GS2 numbers have been playing out as I said for the last eight quarters. Our credit cost as well as asset quality in terms of GS2 GS3 is trending well and our fee based income continues to be a focus. All of this with the continued focus from an operating kind of playbook which is today reset in lot of our investments in tech and digital is going to help us have sustainable and resilient growth in the future.
And this is very much part of the management focus for every quarter as we go forward. So I will pause here now and open up the questions for the call. Thank you very much.
Questions and Answers:
operator
Thank you so much sir. Ladies and gentlemen, we’ll begin with a question and answer session. Anyone who wishes to ask a question press STAR and one on the Touchstone telephone. If you wish to remove yourself from the question queue you may press STAR and two participants are requested to use handsets while asking a question. Ladies and gentlemen, we’ll wait for a moment while the question queue assembles. Our first question come from the line of Maruk Adajania from Noama Wealth Management. Please go ahead.
Unidentified Participant
Yeah, hello, Congratulations. I had a couple of questions. Firstly that after the ECL model annual reset, now do you expect credit costs to hold on at current levels given the environment at 1.3 types over the next few or over the foreseeable quarters. And my next question is what were the changes or could you highlight if there were any big or main changes in the ECL model that we should know about? So that’s my first question and my second question is on interest income. If you could spell out the exceptionals.
Raul Ignatius Rebello
Yeah, thanks. Thanks a lot for the questions. The first one on you know what, whether you think the sustainability of the credit cost. I just want to remind that the kind of zip codes that we have conveyed that our business model can absorb is between 1.5 to 1.7. And we are happy that nine months of this year we have come down to 1.8 and we see a lot of confidence in operating within that zip code. Now there will be quarters when things move up and down broadly. We realize the handle on credit cost is to keep the stock of GS2 and GS3 range bound.
And that’s what we have seen in the last few quarters. Our GS3 and GS2 have remained range bound. So if that remains in line and what we have done in the ECL model refresh also is to make sure that our LGDs are very reflective. The model rightly reflects what should be our PCR cover. So these are the two variables that go into credit cost. Management has to ensure that the stock of GS2 and GS3 are on the same level. And the ECL model we believe is reflective of the PCR cover. Hence the overall credit cost should be in that zone.
Now on your second question on what kind of interest income is exception items? There is no exception items in our interest income. The real expansion that you’re seeing, we called out the 23 levers. One lever is it’s been a year now since we got the corporate agency license for insurance. Earlier on there was some ways in getting insurance back but it was a little bit of convoluted through the MIBL structure. But right now the corporate agency is an in house insurance corporate agency. So we’re able to, you know, get fee income directly through the agency license which we enjoy in the nbfc.
Second big source of income is clearly as we said we have now MIBL is 100% sub. Earlier it was held between us and AXA. After becoming 100% sub there is, you know it’s one of the top five insurance broking companies in the country. They are not dependent on only M and M. They have very very prolific businesses. That business throws up good revenue. It’s a very profitable enterprise. It is not capital intensive. So we are able to enjoy dividend payout. It is not a one time and by now I am sure you would be able to bake it into your modeling.
This is regular income coming in into our fee based income. There are other smaller incomes which is in the form of prepayment penalties and Late fees and all of that. But that is really small. The two big items in fee based income is that. Now one more, you know, there would be kind of impact of. Let’s say that is an overall income, right? I mean not in fee based income. She’s asking the loan income. Okay, Loan income. I hope I’ve explained to you the fee based income in the loan income. ARU the difference between Q3 and Q2, what we see is the other variables at play.
As I said in Q2 we have an X amount of trade advance which is given to augment disbursements in the season. That X amount falls to half in the next quarter. So that let’s say X amount is not interest bearing, it converts to interest bearing in the next quarter half of that and hence that shows an augmentation in the overall loan income, not fee based loan income for Q3 and whatever. Because if we have a GS3 improvement, there is a, you know, there’s a write back of income reversal that happens whenever we have a positive movement of GS3.
GS2.
Unidentified Participant
Okay, thank you very much. Anything on ECL? I mean any major changes in ECL?
Raul Ignatius Rebello
No, we have. The ECL model basically has been, as I said, the objective is to make it as representative of the underlying business. So what we do in the refresh is and we’ve used a very prolific, we have used the old consultants to do it for us and we have taken in new inputs. We have gone much more granular. So each product, let’s say in wheels there were seven products. Now we have gone much more granular in the number of products that are consumed. LGD PD is again much, much more reflective of the business. Yeah, that’s what we’ve done.
Pradeep, if you have anything more to add on the Eclipse methodology you want to add.
Pradeep Kumar Agrawal
Yeah, so one of the major change which we have kind of done this quarter is with the UCLA phrase is that we have moved away from the 42 months rolling LGD calculation to a much larger, you can say period stable calculation which is aligned with industry practice. That’s one change we have reflected this quarter.
Raul Ignatius Rebello
Yeah, earlier it was a 42 month Maru for every business. Right now we are looking at actually the, there’s something called as a lookout period where in the recovery period that we do. So we’ve, we believe the ECL model now will be much more reflective of the underlying lgd.
Unidentified Participant
Okay, perfect. Thank you, Thanks a lot and all the best.
Raul Ignatius Rebello
Thank you.
operator
Thank you. Next question comes from the line of Abhijit Tibreval from Motilal OSWAL Financial Service Ltd. Please go ahead.
Abhijit Tibrewal
Yeah, good evening and thank you for taking my question. First of all congratulations on a good quarter. Also, just two questions. First on the demand side, while giving the opening remarks you suggested that tractors is the product which is seeing the most benefit from the GST cut. Just trying to understand while we’ve all seen three Q numbers and four Q is supposedly the best quarter in terms of business, so how are you looking at demand? I mean is the momentum that we saw after the GST rate cut still sustaining? Because when we speak to other vehicle financials most of them admit that they still see that sustaining especially in passenger vehicles and tractors.
So if you could just help us understand that and more importantly, how do you view at this momentum sustain when we get to the leaner first quarter after a couple of moments from here? If you could just help us answer that question, then maybe I’ll take the second.
Raul Ignatius Rebello
Thanks Abhijit. So you know what we saw at least was a reasonable amount of demand augmentation during Q3 thanks to the demand GST 2.0 enabler. What was clearly encouraging was let’s say in passenger vehicle. We all know that there was only one story, the premiumization story was playing out. And while if you just check most of the OEM data we’ve seen at least a bounce back of the entry level vehicles has showed good promise and being a rural financer, financing also kind of self employed customers, we were able to catch a decent amount of that demand which came in thanks to gst.
Now has that continued unabated through let’s say first month of the quarter. Clearly post festive season and post GST there’s been a little bit of waning of that. It’s not continued at the same clip and I’m sure you would have heard the similar commentary from some of the OEMs and other finances tractor. I mean the rural economy is clearly chugging along much more promising than other segments and I don’t want to just repeat but the big highlights for us is the favorable monsoons as well as price discovery from agri commodities through MSPs etc. Has played reasonably well in getting a player like Asuso rural semi urban, not just in tractor but other vehicle categories to see some rural demand to ride that rural demand wave.
Now too early for me to comment on what will happen in Q1. Our job is to make sure that incremental market share see our business teams track incremental market shares for every vehicle product, we are keen that whatever commerce is happening and where our business model is highly indexed on whether it is tv, cv, tractor, three wheeler in the rural, semi urban, self employed segments, we look at getting a higher clip of the incremental market share. And I just invite, if he wants to add anything on that. No, I think just to, just to add to what Rahul said, I think Q3, the growth of the industry was a combination of two things.
One, of course the pent up demand of September getting into Q3 because the availability of vehicles were not fulfilled in the month of September and part of it got fulfilled in quarter three. Which also means that quarter four may not show the same levels of growth as far as Q3 is concerned. But given the fact that we still have some amount of traction happening in the smaller vehicle segment plus the rural geographies, I think we are quite optimistic of how it will go in Q4 also.
Abhijit Tibrewal
Got it. Thank you for that. The other question I had was around the provisioning bit. While you explained a fair bit of that during your opening remarks. So you also spoke about building some management overlay which is also given out in the notes for financial statements. So is my understanding correct that after this ECL model refresh, at least in this quarter, we have not taken any benefits in terms of PCR and provisions and whatever release we saw from this ECL model research has actually been parked as a magic management over?
Raul Ignatius Rebello
Yes, yeah, that’s right. Your understanding is right. You know, we have quantified the management overlay also. You know, I just also want to draw a comparison. If you, if you recollect in our earlier model also there was, you know, 18 months, month plus we used to keep a certain cover which is there in the notes of the, you know, in the presentation. So if we just went purely by the ECL model, there would have been clearly a release in provision. But we thought it prudent also to make sure that there is, you know, a management overlay that is created.
Which of course for a business model like ours, I’m sure the ECL tool is reflective enough, but there could be occasions when the management would need to look at outside the ecl, whether there would be circumstances to not really dip into it, but instances to basically look at touching the management over.
Abhijit Tibrewal
Got it. And just to follow up on what we just answered, basically what I’m trying to understand is if you remember last two, three, when we had done a ECL model, the first post that we saw a lot of volatility in our Stage three cover, it actually declined and then we increased the COVID after this ECL model deflation which I am understanding is much more exhaustive where you said you’ve gone more granular. So we’re not expecting further volatility in provision covers from here. That’s the one. And I just wanted to squeeze in one last question also.
I mean today, I mean when we look at NBFCs, right? At least for a long time RBI has been saying that they don’t want to give out one more HFC license to an NBFC or one more NBFC license to hfc. In our case we already had one. So what was the rationale behind taking this proposal to the boards of going for a scheme of amalgamation or merger between the parent and the subsidiary mrx? Yeah.
Raul Ignatius Rebello
It might be a little early to give you full details because as you would see from what we have taken the board, we ourselves are going to do a full evaluation of the merits to do, you know, mortgages in one entity versus two. As you know. You know there is today a duplication sometimes in geographies, etc. And there has also been a lot of harmonizing of regulation amongst banks, NBFCs, HFCs. So we are going to completely evaluate whether incrementally is it more efficient to do mortgages along with some of the capital risk weights, etc. Etc.
We are going to do a complete evaluation and on balance finally take a call whether mortgages is more efficiently done in one entity versus two. As you know, today it’s 100% sub. Really we have 1400 branches in the NBFC. We have about 500 branches in the HFC. There could be duplication. At the same time there might be merits. So at this point of time we are going to really make sure that we have a hundred percent evaluation of the merits. And then once that is established, we will at least at the right time come back to both the boards and take a decision.
I think the underlying objective is to play mortgages at scale, to be a scaled player in mortgages. What is the best playbook for participation is what we will evaluate and the boards will take a call post that evaluation.
Abhijit Tibrewal
Got it. This is useful. Thank you so much for answering my questions and I wish you and your team the very best.
Raul Ignatius Rebello
Thanks.
operator
Thank you. Our next question come from the line of Suraj Das from Sundaram Mutual Fund. Please go ahead. Suraj, you may please proceed with the question.
Unidentified Participant
Yeah. Am I audible now?
Raul Ignatius Rebello
Yeah, Suraj, you are. Yeah.
Unidentified Participant
Thanks for the opportunity. Just one Question I think on the practice again in terms of growth probably if you can talk a bit more. Because if I look at the volume growth for the industry on a nine month to nine month basis, I think that.
Raul Ignatius Rebello
We lost you. Can we. Moderator, can you hear him?
operator
No sir, we can’t hear you.
Raul Ignatius Rebello
Okay, maybe we can take the next one. But let me just answer. I think he was questioning on the tractor growth. I just want to. For the benefit of everyone. I know it’s a very strong growth but I just want to give you what has gone behind that. We created two different organization structures for within the M and M group. As you know that there is a Mahindra tractor than a Swaraj tractor. In fact most of our additional manpower and distribution for the year has gone to really equip us to full further our mode in tractor finance.
And this has played out well. Whether it’s on distribution product as well as incremental penetration in the rural geographies. This has not just happened overnight. We have been in the works of creating distribution for the last 12 months now which we are now getting some benefits in the last couple of quarters. Moderator, you can maybe move to the next person in the queue.
operator
Sure sir. Our next question come from the line of Avinash Singh from MK Global Financial Service. Please go ahead.
Unidentified Participant
Yeah, good evening. Thanks for the opportunity. Great set of numbers. Just hopping a bit more on the NIM part and then you rightly kind of peel the layers of it. So if we were to see from here and where the direction of business moving and also the competitive environment there could be, I mean as you incrementally go to some of the probably low yielding segment or even in the existing segment competition increases so the yields will come under pressure a bit. Can you also help here that if the fee, that entire interplay of different factors including your loan related fee and insurance fee, this one and a half percent is it kind of a.
At the kind of a level that is where it is going to max out or you see still this to improve and then of course on the cost of borrowing side of course you will continue to get some benefits from you know, the rate decline. But then again increasing leverage will kind of have its kind of own impact. So this 7 1/2% of physical Indian currently, is it the sustainable level you are seeing or do you see that okay, scope for it to further expand or is it kind of peaking out? So that’s my question once.
Thanks.
Raul Ignatius Rebello
Yeah. Hi Avinash. So straight answer to seven and a half. No, this is a one time. I mean there are certain structural benefits that we are seeing in the NIM expansion but 7.5 has to be read in context of that because we’ve got a loan income Delta from Q3 over Q2 as I explained explained earlier with the trade advance which was earlier not interest bearing but that has run off as well as some of the write backs because of GS2 GS3 I would look at 7.1 being a little more reflective than 9 months, 7.1 being a number that can be.
When you look at when we gather at Q4 next quarter we should see how are we on the 7.1. I would like to remind everyone that we at an overall ROA level said we think the company has to first get to a 2% roe and then climb up. Now there are various elements in the ROA tree to get to that 2%. I mean clearly loan income is one, fee income is another, COF is another. OPEX is another credit cost. So we have multiple agendas and levers that we as management are working on making sure that the the levers are as controllable as possible and there might be an interplay between them for us to get to that 2%.
Now are we happy with the way we are incrementally moving towards that with the levers that we’ve been working? Answer is clearly yes. We believe we have worked on levers on the income side. We have worked on levers on the fee side, levers on the OPEX side on the credit cost side and the cost of fund side. So these are calls we’ll keep taking. But these are not tactical. These are leverage in the longer objective of hitting the 2% ROI and then climbing up from there.
Unidentified Participant
Okay. And on now slightly again on OPEX part. I mean given that you know that you are looking to slightly move away also from wheel. Some, you know, productivity gain will be on the wheel side. But this new initiative might require some kind of expenses. This opex. Do you see a scope for improvement in OPEX over the medium term or this is where you would be, I mean over the foreseeable future.
Raul Ignatius Rebello
We look. At both OPEX to average income and cost to income. And as I mentioned earlier with the business model and the overall ROA we can operate in the ranges of 2.5, 2.8. I mean 2.5 clearly beyond us now. But we are in investment zone right now. So I do see with the new businesses etc. We have to invest. We have a concept called as operating job wherein we are Looking at revenue growth actually exceeding OPEX growth. So sometimes expenses are required upfront which will deliver long term medium term benefits and hence I won’t be constrained only on over managing OPEX for the time right now for the new businesses especially it might be investment time.
Some of it will be we might be able to capitalize those expenses. Some of them will pass through the P and L. So really not looking at being pennywise pound foolish in the overall process.
Unidentified Participant
Got it. Thank you.
operator
Thank you ladies and gentlemen. In order to ensure that the management will be able to address the question from all the participants, we request you to kindly limit your question to one question per participant. If you have a follow up question, please rejoin. Our next question come from the line of Shreya Shivani from Nomura Holdings. Please go ahead.
Unidentified Participant
Thank you for the opportunity. Congratulations on a good set of numbers. I have two questions. My first question is on the CVCE book. While I understand the reasoning for the volume growth of auto industry in the passenger vehicle book and the disbursement that we’ve had, I understand that their entry level cars were sold. But what exactly happened with the CVCE book? Why is there such a large gap between the kind of volume growth the industry is reporting and our disbursal growth in the quarter? My second question is on the credit cost or rather on the provision coverage.
The slide that you showed on slide 14 that you know the reduction in provisions really is coming from the stage to PCR, right? That’s at about 8% now that has been on a continuous declining Trend. The stage three you’ve maintained a 53% range. So what is the thought process going on over there and what kind of improvement can further continue in that book? Thank you.
Raul Ignatius Rebello
Thanks. I’ll take the two questions first on cvc. See I think we basically earlier articulated that in our balancing between growth margins and risk for the CVC business we saw some structural changes happening in terms of the borrower segment. There is clearly an aggregation happening in that segment for the for the fleet operators it is becoming from a unit economic standpoint not very viable for small operators and the cost of funds that the larger players enjoy. Maybe the NBFC balance sheets versus banks may not be as formidable. Right? So we have decided to participate in the CV business in a certain customer segment as well as our new versus used CV choice framework to support our overall ROA aspiration.
Now for the new CV segment I think there has been a reasonable rationalization post GST in the ticket sizes and that’s played out As I said we don’t kind of display that but maybe in the future we will show the unit increase. Also while we have seen a unit increase because of the ticket sizes we have seen a sequential decline in the disbursement value. We are again participating in certain segments as I said where not the extreme fleet segment where we can’t really price it well, nor we participate in the new to, you know, new to new borrower segment.
We are generally in the retail base and while I am sure you would have seen some of the commentary of the other segments, parts of the participants in the CV business are also going through asset quality stress right now. So we do, we are not in a very aggressive build up zone in this segment. Some of the state payments etc have also seen delays and we have to be cognizant of the fact and play in balance over there. Before I go to the kind of credit cost question I just invite my colleague Sandeep if there’s anything to add on.
Okay. On the credit cost. You know I didn’t fully appreciate your question. You were asking whether you know the stock decrease in the GS2 would have, would have created a release in provisioning. Is that your question?
Unidentified Participant
Yeah. So if you see the stage 2 ECL divided by gross stage 2, that percentage is declining for you. All right, so Your Gross Stage 3 PCR you’ve maintained at 53 by doing all the overlays that you’ve spoken about. But there is an improvement in your like you’re providing less in the stage two book.
Raul Ignatius Rebello
I’ll invite Pradeep to come.
Pradeep Kumar Agrawal
So if you look at our stage two book, the overall quantum itself has kind of come down. So that of course will give some release. That’s point number one. Point number two is that generally your PCR coverage is a function of your PDs and LGDs. If your stage 2 book gives you a trend which is better in PDs and both LGDs then of course your overall PCR on the stage 2 itself will keep on coming down. So that’s a reflective of the ECL model which is working and giving us that benefit. But largely the benefit is if you look at the provision cover difference is hardly like you know, a percentage point and all. So I think that’s the kind of outcome of the UCL models.
And if you look at the stage three anyways, if you look at the overall provisioning at a company level, last quarter, if my provision was total provision was 4034 crores of rupees which has come down to 38676 crores of rupees. If you adjusted it for the one time write off then I think we have maintained the overall provision and there’s no benefit taken into the P and S. Got it.
Unidentified Participant
So fair to say that in the stage two book your PCR you can keep taking benefit if the PD LGD trends throw up certain numbers. Right. While you may maintain your stage 3 PCR at a certain level 53 or whatever range you want to maintain, in the stage two book you will keep taking the improvement.
Raul Ignatius Rebello
So it’s so even Stage three, if you ask me, the PCR has to be a result of the PDs is like always stage one I think LGDs. And accordingly stage two also moves with the PDs and LGDs. The provisions are generally by these two factors. That’s why we have created an overlay. So overlay becomes a constant factor and balance amount is kind of derived by the model. So whatever way you can look at this model.
Unidentified Participant
Okay. Okay, that was useful. Thank you. And all the best.
Raul Ignatius Rebello
Thank you.
operator
Thank you so much. Our next question comes from the line of Oman Shah from Kotak Mutual Fund. Please go ahead.
Unidentified Participant
Yeah, hi. Thanks for the opportunity and congratulations on the quarter. Just one question to the proposal which Raul mentioned about merging the housing finance subsidiary with the with the parent company. Given that both entities are engaged into similar line of businesses mortgages. I mean just an extension to that thought. I mean is the management also contemplating merging the MIBL subsidiary with the parent? Right. Again, we are now doing insurance broking in the parent. Excess capital sitting in the subsidiary is getting upstream as dividend income. Anyways, if not immediately in future, will that also be a possibility? Yeah.
Raul Ignatius Rebello
Hi Umang. You know, for the first question I’d repeat that on mrhfl. It is a proposal to evaluate the benefits. The objectives of us going down this path is one, we do believe that we want to be a diversified financial player and we want to play in multiple asset categories which are promising and adjacent. So mortgage. How do we kind of grow mortgages in a scale scalable manner? That’s the proposal on hand. Coming to your second question on mibl. Clearly not. Let me just reinstate that. We have an insurance broking license which has been maintained and the corporate agency license.
These are not to fish in the same ocean. We do realize that the field of and the revenue pool for insurance distribution is very wide and we didn’t want to create a limiting factor of just exploiting the opportunity in the M and M ecosystem or the Mahindra Finance ecosystem. We did believe the corporate agency license gives us a good ability to maximize revenue which is there in the low hanging fruit in the M and M ecosystem and the Mahindra Finance ecosystem. MIBL is looking at insurance distribution across opportunities, general health, life, not in the M and M ecosystem.
Think about all the opportunities of insurance distribution which is available, not limited to the M and M ecosystem is basically being harnessed by mibl and hence there is no thought process. We do believe it’s an independent, you know, it’s governed by an independent board, it has its own management team. Yes, we do derive benefits for it because it is a subsidiary and right now that entity at the scale it’s operating doesn’t need capital and for us to retain too much of the profits it’s going up and hence we felt that there is a clear ability for us to plow back dividend income from there.
But we are definitely not having any inclination. Clearly it’s an insurance distribution business and it will remain that way in the broking.
Unidentified Participant
Okay, perfect, perfect. That helps. Thank you so much and wish you all the best.
Raul Ignatius Rebello
Thank you.
operator
Thank you. Our next question come from the line of Mayur Parkeria from Wealth Managers India Private Limited. Please go ahead.
Unidentified Participant
Good evening sir. Am I audible?
Raul Ignatius Rebello
Yes, yes, please go ahead.
Unidentified Participant
Yeah.
Raul Ignatius Rebello
655. We can go on a little more but let’s have one question least if we can.
Unidentified Participant
Yeah. So again you just mentioned about the time and pardon me for a slightly, slightly longish question, but this is more. This is mainly in the context of your ROA comment from a slightly medium to long term perspective. I don’t know if in the past if as management you’ll have alluded to anything beyond 2% as a number to know anchor or guide over a medium to long term. So if there is any, please reiterate that if any. But the question is more from a slightly longish perspective. Historically when we see earlier we used to see swing of ROAS used to be very high right from 3 and a half percent to sub 1%.
The cycles of credit cycles used to swing from 1 and a half percent credit cost 2 or 3 and a half on the PNL 3.5 to 4% also and that is where the swing of ROAS used to happen over these longish years. We understand that the interest rate cycle is lower and hence our yields are now more in the region of 7% against 9%. So that is a structural thing which we is not going to undergo a change in next two years. Having said that one and a half percent as you mentioned the credit cost band 1.5 to 1.7 is more reflective of a good credit cycle period.
So we are sitting at the bottom of the credit cost cycle in terms. Of the good period. In that light ability of the management to increase roa, where does that come from? And I’m not talking about 10 basis point here and there but from a slightly medium to large what is it that one should look at as a structural business trend from the management side that is first and secondly what if there are external factors where the credit cost band goes out of hand and that what are we doing to ensure that the external risk factors on credit cost do not play to our guidance to our targeted range of roa?
Raul Ignatius Rebello
Yeah, thanks Mayor, Very long question I won’t have such a long answer hopefully see one thing on the ROA I’ll maintain that our objective is to get to 2% and then only after we hit that milestone will we share our plans to but clearly is to the gold standard. No, we do understand that any formidable NBFC from the stable of let’s say the M and M group should deliver a 15% ROE and our goal is to get to that 15% ROE. ROE is the biggest lever and then since we are largely a secured book the questions on debt, equity, etc.
We currently are even more capitalized than we require to we can sweat the equity a little more. So do we intend to stay at 2%? I would say that our intention is to hit the 15% ROE. Also we believe the way to go there is first get to a 2% roe and then climb up with the levers which are there in the overall ROE tree. Now your comment on volatility I’m sure you answered the question also that the huge swings in volatility I think are behind us. I’ve just opened up my comment which saying last 8 quarters we have kept GS3 GS2 range bound yes there was because as Pradeep alluded to the fact that our ECL model had some periods of consideration wherein when the COVID period went out we saw the PCR moving up and down but right now we do think our if we keep the GS2 GS3 range bound and the ECL model is reflective we shouldn’t see such wide variations.
We clearly think a business like ours with the choices we’ve made in the last years couple of couple of years should bring in more stability. The other management levers are in making sure that the business is not so monoline, right? As in if you see still we are a 90% wheels business part of the diversification plan which I admit has not played out to the level it has. We do understand with a Balance sheet of 1 lakh 40 thousand odd crores, loan book of 120 odd crores we need to become much more diversified and that diversification will lead to less volatility also because as long as we are subject to one industry volatility is that much more.
So part of the mortgage playbook expansion which will happen out, SME playbook expansion will happen out is really to meet that long term goals of not being so monoline and not being subject to more intense volatility than a more diversified player is. So that’s largely the objective of why the management is looking at diversification as well as this whole fee based income etc that we talked about to avoid in down cycles extreme volatility.
Unidentified Participant
This is a. Not a new question, just an understanding. Please allow me.
operator
I. I’m really sorry to interrupt you sir but we have a lot of.
Unidentified Participant
Education I’m trying to get. May I please.
Raul Ignatius Rebello
You know just in respect. I can see seven more people in the list. I’m happy to engage outside this call. Also I can give full clarification.
Unidentified Participant
Thank you.
operator
Thank you. Our next question comes from the line of nitesh from Investec. Please go ahead.
Unidentified Participant
Thanks for the opportunity. So my question is on loan growth that you alluded that you will diversify the loan book over a period of time but so there I think mortgage is definitely a large opportunity. How should we build a loan growth from a medium term perspective this year? I think it’s bit slow but let’s. Say from a three year perspective what is the aspiration in terms of loan growth that we are having and how the broadly loan mix may look like basically how the share of wheels will. Move in your view over a period of time.
Raul Ignatius Rebello
Yeah. So if you’ve seen. Thanks for the question Nivesh. The recent disbursement growth has been really. I would say if you look at the job between disbursement growth and book growth of course is holding up because of previous good disbursements in FY23 and 24. We will have to make sure that we start seeing a loan book growth which is in the mid teens. Now clearly this year is subpar as we, you know we’ve seen some tailwinds in tractor etc. But as we start getting more adjacencies from SME and mortgages we do believe That a franchise like ours should look at CAGR growth in the mid teens to high teens.
Where we get that from will be a combination of wheels, mortgage and the SME business. How is the growth going to look? I mean how is the mix of wheels non wheels going to look at? I’ll kind of repeat what I said maybe in the last call over the next four years by FY30 we do believe across now I’m also talking about mortgages in the mix. The loan book should read by FY30 and our objective is to get wheels which is currently in the combined businesses, let’s say MRHFL plus wheels. Today wheels is at 88%.
We want to get that down to 70%. That means the mix from the other asset categories will have to grow which is 12% to 30%.
Unidentified Participant
Sure. And will SME and mortgage will be ROE dilutive or ROE accretive in your view
Raul Ignatius Rebello
in the initial years. As you know as you build businesses they won’t give you a very strong. But we have a plan in the mortgage business also with affordable housing being a big part of that. So we are not just going to mindlessly grow businesses without roa, without the ROA attractiveness of the underlying console that we are looking at achieving initial years could see. As you know, any business which grows in the initial years will take time for the full blown ROI to play out.
Our SME business in fact even right now is giving us encouraging signs on roe.
Unidentified Participant
Thank you. That’s it from my side.
operator
Thank you. Our next question comes from the line of viral shah from IFL Capital. Please go ahead.
Viral Shah
Yeah, hi, thanks for the opportunity. So just first one clarification. You mentioned that now that we have had a ECL refresh and there’s some management overlays also now with us, do we kind of see a scenario where say to a very large degree and extent we are done with the first half, second half seasonality in terms of. The P and L credit cost. Just one follow up over here and then I have one more.
Raul Ignatius Rebello
Yeah. So viral. As you know management overlays can’t be used as per discretion. There are only certain occasions where we can dip into it and we have of course had a very detailed discussion with audit committee, board etc. So this is not to even out quarter one, quarter two. Management still has a high bar in making sure that the GS2, GS3 is range bound. We are basically going to exercise onus on the collection underwriting business teams to make sure that we are not evening out in terms of earnings by creating the overlay we will still be extremely focused on the operating metrics of GS2, GS3 being range bound.
Right. So as you would have seen in the past also the volatility of quarter one, quarter two also has been largely evened out in the last, you know, in the last. In this year and the last year. Yeah. Let’s go to the second question.
Viral Shah
Sure. And HFC piece, the reverse merger. I understand that this is under consideration but the points that need to be considered are not just see the risk which is kind of realignment but also I understand there’s consideration to be had with respect to access to Sarfay Z. You getting say the ability to have an operated effective, lower tax rate. Couple of other benefits are also there, access to NHV funding. So how do you anticipate doing this kind of the exercise?
Raul Ignatius Rebello
Several. I mean I won’t go into the details but there are merits, demerits on both sides. There is risk weights, there is, I wouldn’t say cost of fund is very different for somebody like us. There’s very little arbitrage even today between cost of funds across both entities. Surface c is only 20 lakhs. As you know, affordable housing, etc. Today most affordable housing starts at 20 lakhs and above. There are other recovery tools. So on balance, in fact to even bring this to the boards, we felt that there are merits, demerits on both sides. We will cross the bridge when we have 100% conviction that we will go in one direction.
Right now I would say there are merits on both sides. Our objective is to play mortgages at scale and we do believe playing it at scale means that there needs to be some amount of evaluation of whether doing it in two outfits will give us that scale benefit.
Viral Shah
Got it. And one last.
operator
I’m sorry to interrupt you. I’m sorry to interrupt you but please rejoin the queue for the follow up. Thank you sir. Our next question come from the line of Rajamani from Nirmal Bank. Please go ahead.
Unidentified Participant
Yeah, thank you for taking my question. I just have one question. So just on this fee income jump on insurance, the commission was quite, you know, the, the growth was quite healthy. So now that your corporate agency license is now established up across say seven partners, what kind of run rate should we expect going forward? Is this like a structural margin lever? And how do you think about this going forward?
Raul Ignatius Rebello
Vinod, I just want to clarify. Whatever you’re seeing in that 1.1 to 1.4 is not only insurance income, there are a couple of Things. Yes, insurance is a meaningful part of it now. You know, we have a growing franchise and all the insurance that we do is a combination of whatever is basically good for the customer. Right. I mean we do have customers which come from very deep geographies and our objective is that they are protected and the family doesn’t go into bankruptcy if there is a eventuality. So all the products that we sell are very simple, not complicated, good for customer products. With the corporate agency license that has come in, we have been able to have a very decent amount of penetration into the existing M and M ecosystem system. I would also like to remind everyone, ever since we reorganized our branch structure, we now have 1400 branches which are also distributing under the corporate agency, life insurance, general insurance vehicle, you know, open market vehicle insurance, etc.
So have we hit the headroom? There is still, I would believe headroom for expansion. Are we moving in the right direction in terms of terms of insurance income? Yes. Besides insurance there are other incomes which as I mentioned, dividend income from the subsidiary and a couple of other avenues. And we do believe that yes, we came from a position which was suboptimal. We have climbed to a reasonably good. Have we hit the headroom? I would not say yet. We can still augment this, but this will definitely. Don’t read this 1.54 as a one time. We do believe that this is sustainable going forward.
Unidentified Participant
Understood. Thanks so much for that. Just one follow up. So is this. Are you doing only individual or are. You doing group Also in this, is it only individual teams or you are doing group as well?
Raul Ignatius Rebello
What do you mean by group in insurance?
Unidentified Participant
Yeah, as in group insurance like say group credit, life and so on.
Raul Ignatius Rebello
Yes, yes. Both group individual branches do a lot of retail. So it’s a combination and you know we have set up just for everyone to know. We have a fee and we have a setup, an organization structure which basically supports this from a medium to long term. We are not looking at this being one off. So there is a proper org structure to make sure that this fee based income is a big theme and a priority.
Unidentified Participant
Understood. Thanks so much. All the best. Thank you.
operator
Thank you. The next question comes from the line of Piran engineer from clsa. Please go ahead.
Piran Engineer
Yeah. Hi team. Congrats on the quarter. I’ll make this quick. Just getting back to the first question on loan income now you. You explained that it’s gone from 11.6 to 12 because the 11.6 had the trade advances in the denominator. But if I go back one quarter, it was 11.7 in the first quarter. So over a two quarter period where we ignore the trade advances noise, it’s still up 30bps. So I’m just trying to reconcile how to think about this in the context of increasing competition, declining yields, etc.
Raul Ignatius Rebello
Hi Viran, thanks for the question. One needs to also look at the inter quarter, what happens between the quarters in terms of GS2GS3. So whenever the stock of GS2GS3 improves then you have a write back also in terms of interest income. So it’s not only the festival period trade advance, it’s also the inter quarter. So we wouldn’t have had between Q4 and Q1 such a GS2 GS3 improvement which we saw. As you know, and I pointed out, our GS2 GS3 between Q2 and Q3 has seen a significant improvement and that delta has been enjoyed in Q3 in terms of the loan increase.
Piran Engineer
Got it. Okay. That’s. Yeah, that explains it. Tiger. Thank you and wish you all the best.
operator
Thank you so much. Ladies and gentlemen, as there are no further question from the participant, I would like to end the conference. Over to Mr. Nishin Chavata for closing comments. Thank you. And over to you sir.
Unidentified Speaker
Thank you everyone for joining us today. We thank the management of Mahindra Finance for giving us an opportunity to host a call. Thank you very much. Good night.
Raul Ignatius Rebello
Thank you. Thank you. Thank you.
operator
Thank you so much. Ladies and gentlemen, on behalf of Kotak Institutional equities, that concludes this conference, thank you for joining us and you may now disconnect your lines. Sam.