Shares of Mahindra & Mahindra Financial Services continued losing streak on Wednesday, falling up to 1.9% in early trade after the company deferred its March quarter results as it detected a fraud worth ₹150 crore at one of its branches in the NorthEast region. Following this development, Centrum Broking has downgraded Mahindra Finance to ’Sell’, saying that fraud at one of the branches may impact its earnings.

Investors remained jittery even after the company increased its borrowing limits from ₹1,10,000 crore to ₹1,30,000 crore, which include fundraise by way of issue of non-convertible debentures (NCDs) or any other securities, in one or more tranches. The fundraising proposal is subject to approval of the shareholders of the company to be obtained at the ensuing 34th Annual General Meeting (AGM).

“The board has also modified the resolution for issuance of NCDs, in one or more tranches, while keeping the aggregate limits for issuance of NCDs as remaining unchanged i.e. limit not exceeding ₹65,000 crore which shall be within the overall aggregate borrowing limits of the company,” Mahindra Finance said in a BSE filing last evening.

Early today, M&M Financial shares opened a tad higher at ₹265.55, after ending 5.45% lower at ₹263.60 in the previous session. In the first two hours of trade so far, the Mahindra Group stock fell as much as 1.9% to ₹258.60, while the market capitalisation dipped to ₹32,085 crore. The counter witnessed a spurt in selling activities as 2.78 lakh shares changed hands as compared to two-week average of 2.77 lakh stocks.

The non-banking financial institution (NBFC) stock has been under stress for the last four sessions, losing over 11% during the same period.

The shares of Mahindra Financial touched its 52-week high of ₹346.40 on July 4, 2023, and a 52-week low of ₹243.90 on October 30, 2023. The counter has given flat return of 2% in the last one year, while it shed over 5% in six month and 6% year-to-date. In the past one month, the stock has fallen over 5%.

In an exchange filing early yesterday, Mahindra Financial said that its board meeting scheduled on April 23 to approve the financial results, recommendation of dividend, AGM, and related matters, have been deferred to May 30, 2024. The decision to delay the board meeting was taken after a fraud worth ₹150 crore was detected at one of the company's branches in the NorthEast.

“In respect of retail vehicle loans disbursed by the company the fraud involved forgery of KYC documents leading to embezzlement of company funds. The investigations in the matter are at an advanced stage. The company estimates that the financial impact of this fraud is unlikely to exceed ₹150 crore,” it said in the exchange filing.

As per the company, investigations are underway, and necessary corrective actions have been identified and are at various stages of implementation, including arrest of few persons involved.

Following this development, Centrum Broking has downgraded the stock to ’Sell’ with a target price of ₹249 per share. The brokerage in its report says, “The estimated amount involved of ₹150 crore is almost 3.7x of average company disbursements of ₹41 crore per branch suggesting that fraud has been going on for several months/years. This may impact our earnings estimates for 4QFY24 and FY24 by 22% and 8.2%, respectively and Net worth by 0.8% for FY24E.”

“We expect more clarity on this fraud and corrective actions initiated during 4Q results.  Given the negative development, we have cut our Target multiple on standalone business to 1.5x from 2x earlier. We roll forward to FY26 from 1HFY26 and value the standalone business at ₹230 and subsidiaries at ₹19 to arrive at our target price of ₹249,” the report notes.

The report highlights that disbursement may remain impacted over the next one or two quarters as the company may focus on strengthening its internal processes with growth likely taking a back seat.  The disbursement growth for Mahindra Finance has already slowed down since June’23, with the company registering disbursement growth of 13% for FY24.

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