Two rural-focused NBFCs have delivered exceptional Q1FY27 results, demonstrating significant recovery momentum. Mahindra & Mahindra Financial Services (MMFS) reported a 75% YoY increase in consolidated net profit to ₹927 crore, supported by a 23.4% rise in net interest income and 430 basis points improvement in cost-to-income ratio. L&T Finance (LTF) achieved its highest-ever quarterly profit of ₹902 crore, up 29% YoY, with net interest income growing 31% to ₹2,684 crore. Both companies showed improved asset quality metrics, with MMFS achieving an 8.3% combined gross stage-2 and stage-3 assets - an eight-year low - while LTF's consolidated gross stage-3 assets dropped to 2.86% from 3.29% in Q4FY25.
MMFS recorded its highest-ever disbursements of ₹15,564 crore, up 22% YoY, taking AUM 13% higher to ₹1.46 lakh crore. The company's net interest margin improved to 7.3% from 6.7%, while return on assets rose to 2.4% and credit costs fell to 1.5%. The business is becoming more diversified, with 17% of the total lending book now accounting for non-wheels business, including housing finance. However, tractor finance jumped 45% YoY to ₹2,480 crore, making it the strongest growth driver but also the most exposed to monsoon risks.
LTF's growth strategy focuses on retail diversification, with retail lending now accounting for 98% of the ₹1.29 lakh crore loan book. During Q1FY27, personal loan disbursements jumped 126% to ₹4,380 crore, two-wheeler finance grew 41% to ₹3,060 crore, while rural business finance and SME finance increased 24% and 23% respectively. Gold loans emerged as a fast-growing segment, with the book expanding 182% YoY to ₹3,829 crore. The company has been using AI-based underwriting engine Project Cyclops to strengthen borrower quality, increasing prime borrower share in two-wheeler finance from 52% to 90%.
The P/B comparison reveals a significant valuation gap between the two stocks. MMFS is trading close to its five-year median P/B of 1.8 and industry median of 1.85, while LTF commands a P/B premium of 2.8 compared to its historical median of 1.6. MMFS is trading near its historical valuation despite improved RoA of 2.4% and credit costs falling to 1.5%, while LTF's credit costs remain above the sub-2% target at 2.54%. The valuation premium reflects LTF's faster diversified growth, but investors must monitor whether the retail book continues growing at high rates while credit costs approach the company's target.
Both companies face significant monsoon-related risks as rainfall has been erratic across India, with some states like Andhra Pradesh and Bihar recording rainfall deficit of up to 42%. According to IMD, this year's monsoon has been the weakest in 17 years. For MMFS, tractor collections remain the key number to watch given the 45% YoY growth in tractor finance, while LTF's rural business finance and micro-LAP segments could still be affected by agricultural cycle weakness. The next two quarters will test whether the current earnings momentum can sustain through uneven rainfall patterns and potential pressure on rural cash flows.
