Mahindra Finance shares fall 10% despite profit jump

If profit rose 55%, why did Mahindra Finance shares fall 10%?

Profit jumped 55% in the July-September quarter, but investors look ahead, not back. Brokerage Nomura, a Japanese financial firm, cut its profit forecasts for the next three years by 1-9% because two costs are rising: the interest Mahindra Finance pays to borrow money, and bad loans in tractor financing. A weak monsoon could leave farmers, whose income depends on rain, unable to repay tractor loans.

Why is the company shifting away from vehicle loans?

Vehicle loans, especially tractors, are tied to monsoon and farmer income, which makes them risky. Mahindra Finance is growing its non-wheel business (SME, mortgages, and personal loans), which grew 79% in the quarter and now makes up 20% of lending assets. This diversification is meant to smooth out seasonal swings and reduce dependence on cyclical auto sales.

Why would a 10% share fall but rising costs worry investors?

Nomura's cut to profit forecasts matters more to the stock price than the reported profit jump because investors value what comes next, not the past quarter. The brokerage expects credit costs to rise from 1.7% to 1.8% and funding costs to climb by 70 basis points over five quarters, squeezing margins the company works hard to maintain. A 10% drop reflects the market pricing in that future squeeze, even while today's numbers look strong. Our read: the stock fell because the market believes the company's costs will outpace its ability to grow profitably.

How does the shift to non-wheel loans protect profits?

The non-wheel business, now 20% of lending assets, grew 79% versus 20% for wheel financing, with SME alone up 30% and personal loans up 77%. These loans carry floating rates, unlike fixed-rate tractor loans, so they reprice faster when interest rates rise. That helps offset the 70-basis-point funding cost increase Nomura expects. Our read: diversification is the company's main defence against the cost squeeze, but with 80% of assets still in vehicles, it cannot fully shield profits from a monsoon shock.

If non-wheel loans only hedge, what else cushions a monsoon shock?

The company carries a liquidity buffer of over ₹16,200 crore, at an all-time high, and management says it may not raise it further even if unused. It also uses securitisation to sell loans and raise funds. Tractor underwriting itself is tightened: loans are structured around farmers' cash flows, with quarterly or half-yearly installments, and the company demands bigger down payments where risk is higher. Stage-2 and Stage-3 assets both improved in the quarter, suggesting the existing portfolio is holding up despite the weak monsoon forecast. Our read: the buffer and tighter underwriting are the first line of defence, and diversification is a slower, longer-term fix.

What happens if the cost of borrowing keeps climbing?

Nomura expects funding costs to rise by 70 basis points over the next five quarters, and management agrees the trajectory is upward. The company's cost of funds rising faster than what its loans earn would squeeze net interest margins, which already stayed flat at 7%. The floating-rate non-wheel loans and securitisation help it reprice faster, but the core tractor book is fixed-rate. Our read: the 10% share fall is the market pricing in that margin squeeze, not a bet that loans will default.

What decides whether these profit fears are right?

The next test comes at the end of the sowing season, when tractor loan repayments are due. Nomura expects credit costs to rise to 1.8% from 1.7% in the first half. If farmers repay despite a weak monsoon forecast, costs will stay low; if not, profits will shrink. Watch the next quarter's credit cost number.

Why would rising borrowing costs hurt Mahindra Finance if credit costs?

Credit costs are what Mahindra Finance loses when borrowers fail to repay; that fell. Funding costs are what the non-bank lender itself pays to borrow money from banks and bond markets to lend out. Nomura expects a 70-basis-point rise in these costs over the next five quarters, squeezing the gap between what it pays for money and what it earns, slowing future profit growth.

What else could derail the plan besides bad monsoon?

Two additional risks stand out. First, rising funding costs: Nomura expects a 70-basis-point increase over the next five quarters, squeezing the gap between what Mahindra Finance pays for money and what it earns on loans. Second, proposed insurance distribution reforms could cut income, since insurance contributed 35 basis points of average assets in FY26, though management has not quantified the impact. Notably, the company raised fresh debt in September 2026 at a 7.95% coupon, reflecting borrowing conditions. Our read: the market is pricing in that these pressures, not just monsoon risk, will slow profit growth.

What would change the market's mind about the risks?

The market's view hinges on two things that are independently observable in coming quarters. First, tractor loan defaults: the repayment window at the end of the sowing season, roughly December to March, will test whether the weak monsoon forecast forces credit costs up from the 1.6% to 1.8% Nomura expects. Second, funding costs: the company raised debt in September at a 7.95% coupon, and Nomura sees a 70-basis-point rise in what it pays for money over the next five quarters, squeezing the margin between that cost and the 7% net interest margin it holds. Management says it plans no equity raise for six to eight quarters, and an all-time-high liquidity buffer of over Rs 16,200 crore gives it time. The company's own targets, return on assets of 2.2% to 2.5% by FY31, assume it can hold the line. Our read: if credit costs stay near current levels through the sowing-season test, the stock recovers; if they rise, the 10% fall was the start, not the whole move.

Can the shift to SME and mortgages actually protect profits?

Partially, but it adds a different risk. The non-wheel book grew 79% and now makes up 20% of lending assets, with SME loans at 6.6% of the book. These loans carry floating rates, which Nomura says could help offset rising funding costs. However, they also carry higher credit risk than vehicle loans. The company targets 30%+ growth in this segment, but the margins on SME and personal loans are thinner. Our read: diversification smooths tractor seasonality, but it does not eliminate the core risk, which is that the overall book's credit costs rise faster than the 1.8% Nomura expects.

If farmers fail to repay, can the company absorb the hit without raising fresh equity?

The company holds an all-time-high liquidity buffer of over Rs 16,200 crore and plans no equity raise for six to eight quarters, which buys time if tractor defaults rise. Its credit cost target of 1.3% to 1.7% across cycles frames the expected worst case, while Nomura sees costs at 1.8% in the second half. That gap is narrow, so a spike beyond it would pressure profits but not solvency, given the buffer and access to securitisation. Our read: the buffer covers a moderate shock, not a severe rural downturn, which would force a capital call.

How could weak monsoons hurt Mahindra Finance tractor loans?

Tractor buyers are farmers who often repay when they sell the harvest. The company's annual report expects rainfall near 92% of the long-period average, suggesting a weak monsoon. A poor harvest cuts farmer income, making repayment harder. Nomura expects credit costs to rise to 1.8% in the next two quarters from 1.7% in the first half, since tractor loan quality is judged when sowing-season repayments fall due.

Why are funding costs rising for an NBFC like this one?

An NBFC is not a bank, so it borrows money from banks, bond markets and other lenders to hand out loans. Nomura expects the company's cost of funds to rise by 70 basis points over five quarters, partly because overall interest rates are heading up. The company has some protection: excess liquidity, floating-rate loans outside the vehicle business and securitisation, selling loan pools to raise cash. Our read: even those cushions only slow the squeeze, they do not stop it, which is why profit forecasts were trimmed.