M&M Finance: Brokerage downgrades stock to sell on fraud detection; on charts, support is seen at Rs 250

Mahindra & Mahindra fraud case, Mahindra & Mahindra share price: Shares of Mahindra & Mahindra Financial Services (M&M Finance), the finance arm of the Mahindra Group, slumped as much as 7.88 per cent in the opening deals on Tuesday, April 23, after the company informed exchanges of fraud in one of its branches. Given the development, the company, which was scheduled to announce its March quarter (Q4 FY24) numbers today (April 23), has deferred the same to a later date. 

The company said, "We hereby inform you that during the end of the 4th quarter of the financial year ended March 31, 2024, a fraud was detected at one of the company’s branches in the North East. Regarding retail vehicle loans disbursed by the company, the fraud involved the forgery of KYC documents, leading to the embezzlement of company funds. The investigations into the matter are at an advanced stage."

The company estimates that the financial impact of this fraud is unlikely to exceed Rs 150 crore. The company added that investigations are underway, necessary corrective actions have been identified, and they are at various stages of implementation, including the arrest of a few persons involved. 

The company added that the board meeting to consider financial results for 4QFY24 and full-year FY24 has been deferred to May 30, 2024. The stock ended at Rs 263.60, down 5.47 per cent on the BSE.

How does the stock look on charts?

M&M Finance shares have moved a little in the past 12 months (up nearly 6 per cent). Placed on technical charts, the broader outlook on M&M Finance suggests a major hurdle around Rs 300–Rs 315 levels, implying a selling pressure zone. 

The breakout exists once the price action succeeds in overcoming this hurdle range. On the downside, Rs 250 remains a support during the current uncertainties, according to Avdhut Bagkar, Derivatives & Technical Analyst at StoxBox. 

A breakout above Rs 310 could see the stock heading towards the Rs 400 mark, while a breakdown beneath Rs 250 could send the stock into bear grip, denting the medium-term outlook and witnessing the scrip slipping to Rs 180 levels.

Derivative data reveals the addition of longs in 270 PE, 260 PE, and 250 PE in the May series, signalling a strong negative bias for the following sessions. The May PCR stands at 0.70, while the April PCR stands at 0.82. Despite exhibiting substantial interest on the bearish side, if the price holds the Rs 250 level, the short covering may witness a resilient up-move.

Fundamental View

Centrum Broking, in its note, said that the estimated amount involved of Rs 1.5 billion is almost 3.7x of average company disbursements of Rs 410 million per branch, suggesting that fraud has been going on for several months or years.

"This may impact our earnings estimates for 4QFY24 and FY24 by nearly 22 per cent and 8.2 per cent, respectively, and the net worth by nearly 0.8 per cent for FY24E. In our view, there may be a slowdown in growth as the company works on strengthening its internal processes," it said.

The brokerage added that they expect more clarity on this fraud and the corrective actions initiated during the 4Q results. Given the negative development, it has cut its target multiple on standalone business to 1.5x from 2x earlier. "We roll forward to FY26 from 1HFY26 and value the standalone business at Rs 230 and subsidiaries at Rs 19 to arrive at our target price of Rs 249. Downgrade to sell," the brokerage said.