Ladies and gentlemen, good day and welcome to Mahindra Financial Limited Q2 FY 2026 investors conference call hosted by Axis Capital Limited. As a reminder, all participant lines will be in 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 and zero on your digital phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Praveen Agarwal from Axis Capital. Thank you. And over to you. Thank you.
Good evening everyone and welcome to this earnings call of Mahindra Finance. Today with us we have the management team led by Mr. Raul Rebello, MD and CEO. Along with him we have Mr. Pradeep Agrawal, CFO, and Sandeep Mandrekar, Chief Business Officer. I would request Mr. Rebello to share his initial remarks post which we will open the floor for Q&A. Over to you, Mr. Raul.
Yeah, thank you, Praveen. And good evening everyone. Thank you for joining us on the quarterly earnings call. I'll keep it brief and have maximum amount of time for Q&A. I request you, as always, to keep the document handy because we will be referring to specific numbers and commentary which we have shared earlier in the evening. Diving straight in, if I were to guide you to page number four titled Key Priorities, you'd see this slide.
It's a similar slide we put up every quarter. Number one on the progress on defending and growing our wheels leadership. As you know, this is a crown jewel business. While we participate predominantly in the passenger vehicle, tractor, TV, and used vehicle business, I think it's fair to note that though Q1 was muted, the later half of Q2 after the GST announcements has definitely seen a positive movement even beyond Q2 because October is well into October and with this positive development and the whole festive demand, which I think has been well covered, we do see as a beneficiary of all the increased momentum we are going to witness and expecting this to continue into Q3 and some part of Q4. Our play in the wheels business, we do believe we are well positioned to ride the tailwinds of that momentum.
The second part on the key priority, which is on margins. Within margins, you would have seen in our Q2 results, we did share with all of you our aspiration to climb up from the 6.5 we had started moving up. This quarter has seen a very positive momentum to sell in, aided by both cost of funds and some kind of income level enhancements, but I will spend more time on NIMs to just set the right expectations as we go deeper in the document. The third agenda on risk and asset quality, I would say the environment in Q2 always is historically a challenging quarter and usually we see from Q1 a steeper climb up. I think our teams have done a good job this year. If you look at the overall GS3 plus GS2, it's remained even lower than last year Q2 at 9.7%.
In fact, it remains same as Q1 levels. The GS2 plus GS3 moving to diversification. Our SME business, which is largely the part of the diversification that we do right now, has grown both quarter-on-quarter and year-on-year, and our fee-based income, which we called out as part of the diversification strategy, is now up and it's 1.4% of our average assets along with the main NBFC. We did call out one of the other asset-focused subsidiaries, which is the Rural Housing Finance company, as a key turnaround agenda for us. I'm happy to note that in the quarter gone by, we have concluded an ARC transaction, which means that the HFC today from a GS3 is below 3% and even from a net stage 3 is closer to 1%, while also posting a profit for the quarter.
I request you to move to now page number five, which evidences what has been growing in terms of disbursement within our overall asset categories. What you would see clearly is what's driving growth is the tractor business. You're aware that the rural economy is doing much better and aided with a lot of tailwinds of stable rains. There is now, of course, the problem of unseasonal rains in some places. Overall, price discovery in rural still is positive and that is a positive for us both in collections as well as demand in tractor. Our own tractor business has grown Q2 this year over last year by 41%. The rest of the vehicle categories have been reasonably flat, so 4% for the used vehicle business, PV at 1%. Fair to say that because the whole festive demand this year is different than last year.
Last year we were looking at festive period mostly October, November; this year September, October, and parts of November too. Q2 wouldn't have seen the real uplift of the festive season because essentially the Navaratra started on 22nd. We did get some later half of September action, but you all know from August onwards with the GST announcement there was largely a lull before the 22nd demand that started picking up again. Referring to page number six, seven, and eight, now AUM growth is at 13%, income growth at 14%. Now getting into NIM expansion, and you can look at page number eight for this. The overall NIM expansion has moved from 6.5%- 7%. Now what are the levers over there? Overall income has gone up by 10 bps to the total income by average assets by 10 bps from 12.9 bps last year to 13 bps.
Lifts over here have come from fee-based income, which we talked about, as well as now steady state every quarter ever since we have bought our wholly owned subsidiary MIBL. It was earlier partly, I mean it was still majority owned but now it's a wholly owned subsidiary, a very capital light entity requiring more. It's throwing up cash for us. We are taking regular dividend into the NBFC from that entity and we will continue to do this. Both the dividend income as well as the fee-based income is creating an expansion into our overall income by average assets. The other big lift in terms of NIM has come from clearly cost, which has moved both quarter-on-quarter and year-on-year by 30 bps. You would be aware that rate environment has been favorable.
We have shared in the past we have a significant amount of our borrowing which is floating and we have majority of our lending which is fixed. That does give us an advantage. Also, considering we just have the rights issue, it is a positive for us because the leverage is lower at the moment and hence I would say right now the NIM has benefited from both these two. Overall, when you look at OpEx to average assets, etc., that's been largely flat. No major commentary on that part. Moving to page number nine which is a half yearly number versus last year. I think these numbers more or less are going in tandem with the Q2 number. Since Q1 we didn't have this the same level of high PAT growth. Overall, for half year we are looking at a 25% PAT growth from last year.
That was INR 1,100 crores requested to move. As I move my commentary to asset quality and credit cost to move to page number 10 here, I would say we are reasonably happy with the way in which our asset quality has panned out for Q2 and why I say that is if you look at the past Q2s over Q1 you will see that historically we have climbed up because the operating environment gets tough with the monsoons that come in with the kind of cash flow crunch that happens with the semi urban rural customer segment. Just for reference point, last year between Q1 and Q2 the GS3, the volume GS3 movement as you see in slide number 10, moved up by 27 bps. That number has moved up only 9 bps this year.
Also very encouraging is Stage 2 which had a 32 bps expansion last year between the two quarters has actually fallen by 7 bps. Overall, our GS2 plus GS3 which we mentioned at 10.26 bps this year is 9.72 bps which is in fact a reduction from last year Q2, also importantly versus the 60 bps increase last year between GS2 and GS3 is just a 2 bps increase. Our collection teams have done a reasonably good job and we are also having we've been onboarding a book which we think is commensurate to a risk appetite which is showcasing both the GS3 as well as the GS2 improved outing for us. The last slide I'll spend time on is page number 11, which gives you the breakup of credit cost.
On credit cost, again looking at the last two year trend, Q2 because of GS3 movement etc., we have always historically had a higher credit cost in Q2 over Q1 and credit cost is influenced as you all know by provision and losses. Provisions, I spent time talking about what goes into provisions, is the stock which is the volume. Not seen any change there. What also plays a role is the PCR cover and the PCR cover, as you know, we benefited last year. There was a climb down from our elevated levels, but it also guided saying that we don't see our PCR cover going more than 54%-55%. We have climbed up in our PCR cover between Q1 to Q2 from 51.4% to 53% and that's driven some of the provision for the quarter. Overall, the controllable variable which is GS2 to GS3 has been raised down.
That's largely the overall commentary on growth, margins, and risk. On balance, I would believe it's a decent quarter, positive recovery on margins, asset quality kept range bound, and a hopeful view that we have of how H2 is going to play out. All that I can say is watching the volumes that we have seen in the recent past and some of the encouragement from GS2, sorry, from the GST 2.0, we do see some demand coming back specifically for a vehicle player like us, specifically emitting growth in passenger vehicle, seeing very strong tailwinds for tractor and CV not so much, but clearly a departure from H1. We do expect to see continued momentum which will augur well for us in H2 of this year. I'll pause here and open it up for Q&A.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may 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 will wait for a moment while the question queue assembles. We'll take the first question from the line of Mahrukh Adajania from Nuvama. Please go ahead.
Hello, good evening. My question was just on the ECL working. Would it be fair to assume that the base would be somewhere in September 2020? That would be the referral. Is that why the credit cost looks very high though the asset quality seasonally has actually seen improvement?
If the base is adverse, does it continue into the next year as well as we roll forward? That was my question on ECL.
Yeah, so. Hi Mahrukh, thanks for the question. I didn't hear the second part, but let me first answer your first question. As you know, we take, for the LGD computation as well as ECL, we take a 42-month period. The stock that would have been isolated to watch at 42 months would have been the March 2022 stock, which would have performed over a period of 42 months. That's the number, the PCR cover based on the LGD movement over there. Having said that, every year we do an ECL model refresh in Q3 where we look at basically the ECL being the pure reflection of what should be the coverage that we maintain, which should be mimicking the LGD, that the portfolio should be more reflective of the LGD of the portfolio. What was your second question? I didn't hear that.
My second question was about the base next year, like when you do the. Now it will be this year itself because you will refresh the ECL in March.
We refresh the ECL in Q3, which is.
Sorry, in December. Basically, the base is adverse is what I'm asking.
We can't call it the basis adverse, you know, because our earlier businesses, the stock of GS3 would move between quarters. That becomes a new base to calculate the 42 months. It's the recovery over that period of 42 months from when that, now the March base will move to the June base of 22.
Got it. Okay. Okay, thanks. Thank you.
Thank you. Take our next question from the line of Raghav Garg from Ambit Capital. Please go ahead.
Hi, good evening. I just have a couple of questions. One is if you can give me the number for the dealer funding book for the quarter. I am asking them because I want to understand.
Hi, Raghav, can you hear me? Louder.
Yeah. Can you hear me now? Better.
Okay.
I just wanted to understand what is the dealer funding book for the quarter. I suppose that Q2 is where you do a lot of dealer funding because that's generally the trend. I just wanted to know what is the outstanding on that front and is that why there has been some impact on the yield? If you adjust for that, maybe the yield will be a little bit higher than what has been reported during the quarter.
Yes, Raghav, your observation is right. Q2 does see us helping dealers get to their inventory stock up. As you know, the season was up in September and many of them were stocking up before that. Trade advance does play an important role for grazing our retail business. In the ballpark of about INR 6,800 crore would be the trade advance limit.
Yes, that could have a slight drag because the yield on that is not there. That does have a drag to some extent on the Q2 numbers.
Understood. Another related question is, I did some calculations based on disbursement data and the outstanding figures for the passenger vehicle loan. It appears that the repayment rates have come down. Is that also because of this dealer funding book? The trade advance of INR 6,800 crore.
Sorry, can you repeat that?
Yes, passenger vehicle. Given your data on disbursements and also the amount outstanding in the passenger vehicle segment, the repayment rates look lower versus what the trend has been. Is that because of the trade advances?
Yeah, that's the right observation.
To that extent, has there been some reclassification?
I have not seen that happening in the past quarters into 2Q where the repayment rates have come down as much or as significantly as they have in Q2 this time.
No, I don't think we've changed any classification for this.
Sure. Understood. Understood. What was the trade advances number in the same quarter last year?
I'll have to pull that out. Can I get back to you on that?
No problem. Just one last question from my side. I think last quarter you had mentioned some in the M&HCV segment and you were trying to work your way around it. How is the situation now? I think you also mentioned that there is some departure from what you saw in the CV segment in one edge.
It may not be a material improvement but it appears that you sounded a bit more optimistic than what you were saying in Q1. Any thoughts on whether things are improving for.
The management line is disconnected. Request you to stay connected, please, while I reconnect them. Thank you. Ladies and gentlemen, please stay connected.
Sam it.
Ladies and gentlemen, we have the management team back on the line. Raghav, can you repeat your question please?
Yeah, sure. My last question was if you can, you know, give your thoughts on what is your asset quality outlook on the CV segment. I heard you say on the call that in your opening remarks that H1 there could be a departure in H2 from what you saw in H1. It appeared that, you know, you sounded a bit more optimistic on the CV segment. I just wanted to understand what are you seeing on the ground with respect to that. That's all.
Yes. No, thanks Raghav and everyone else on the call. Apologies from our side. Our landlines have gone, so I'm taking the call on my mobile. Raghav, I'll just rephrase. What I mentioned was H1 has not baked in the entire season effect because you only had volumes coming in from September 2022 onwards.
There was a big lull before that because ever since the GST new rates were announced from August 15th, we saw a little bit of a completely new. I said H2, just going by how end of September and October, well into October, has played out. We do see a huge, is a little bit of an overcastment, but we do see a good amount of H2 volumes that could come in, which will benefit us both from a PV standpoint and a tractor standpoint. On the PV, I said I don't share the same enthusiasm because we haven't seen the same clip of growth that we have seen now in the festive season for tractor and PV rub off on the CV segment too. There is definitely a benefit from, you know, from Q1 levels.
I don't think that level of momentum can be ascribed to the CV segment, at least for the segments we participate in.
Okay, thanks. That's very clear. Thanks for your answer.
Thank you. We'll take our next question from the line of Remish Bhuva from ICICI Securities. Please go ahead.
Yeah. Hi sir. Congrats on a good set of numbers. There's two things. One, again, you know, coming back to the credit cost part, obviously sequentially we did see little higher credit cost. If you look at this quarter in particular, credit cost being at 2.2% with similar write off and marginal hires of PCR, which essentially means that.
Roll.
Forward from GS2 to GS3 will be higher. If that is the case, then how confident are you that in the second half we'll be able to contain credit cost within guidance range of 1.7%?
Yeah, thanks. Thanks, Renish, for your question. See, we have mentioned that it is our business model objective to keep credit cost within 1.7% for the full year. If you go back to our past also, quarter one and quarter two always is a slightly higher level, and we are able to demonstrate and execute a reasonably better Q3 and Q4. Standing right now at the end of Q2, I do believe that what we executed on Q2 was reasonably good considering the overall environment. Am I changing my posture from our 1.7% guidance?
No, I think we'll be able to, with the variables at play, whether it is the stock of GS2, GS3, as well as the PCR cover with whatever we have visibility on, as well as the end losses that we are currently tracking. I'm not changing my guidance of going above 1.7% as our stated credit cost.
Got it, got it. It is very helpful, sir. Secondly, on the growth side, used vehicle has been one of the key growth drivers in recent past and also up by 14%. Just wanted to get some sense what is driving this growth and also what percentage of business comes from the Mahindra for strength.
Yeah, so see, used vehicle, just to put in context, I think it used to be about 16%- 17% of our incremental disbursements. Because of the ROA accretiveness of this business, it's now closer to 18%.
For us, the used vehicle business is a combination of our own customers. We have a good base of, we have funded, our live customer is about 22 lakh, but we have funded, I think, close to 10 million or 11 million odd customers. We harvest that base for top-up loans and for use on those vehicles. We have a good base of our existing customers as well as we do from the open market range through First Choice, through multiple other, you could say, aggregators both online and offline. We are clearly cognizant of the fact that with the price cut which has happened on the new vehicle, there will be impact on the used vehicle. There are also associated risks.
We will have to calibrate all of that in our goals going forward business plan, which we've already done some early steps, but is it a segment that we will continue to be invested in? The answer is yes. I can't give you specific how much we do through First Choice and other aggregators.
Got it. Got it. No, but they're in the top two, three aggregators that we work with. Got it. Got it. Just to follow up on that, as you rightly pointed out, you know the DSP and eventually, you know, used vehicle prices will also come down. Now, considering both these things, do you foresee any risk to vehicle finance growth for FY 2026 or do you feel volume will by not offset the price cut?
So far, what we are seeing is, of course, festive season exuberance, but at least from the various channels that we work in, we think there will be a good volume growth that will maybe offset some of the value or the price reduction which has happened. Also, what we're seeing is there is a premiumization play which is happening. Many of the customers who are buying vehicles are moving towards higher variants, etc. Both are playing out. Customers who are sitting on the fence and not buying vehicles are entering the small car segment and the entry level, and customers who were earlier in the mid segment are now driving the premiumization and buying. We do think that there is a good, you know, impact, overall impact of the GST 2.0 in the fortunes for overall FY 2026.
Got it.
This is true for using new book or is more for new season is usually November, December onwards. We will watch it as it goes forward.
This is very helpful. Thank you and best of success. Thank you.
Thank you, ladies and gentlemen. In order to ensure management is able to answer queries from all participants, kindly restrict your questions to two at a time. We'll take our next question from the line of Shweta Daptardar from Elara. Please go ahead.
Thank you, sir, for the opportunity. The two questions, the first one, sorry for harping on the credit cost again because you mentioned that the reset will happen now in Q3. Where do we see the credit cost in the near term, and do we still see 1.7% in Q3?
Yes, to answer your question on credit loss and the ECL reset. See, the ECL reset is an annual exercise where the objective of the ECL reset is to kind of make the model reflect the underlying nature of the portfolio. That's always why we do a reset, to ensure that the ECL is reflective of LGDs and the overall provision cover that we need to maintain. I don't want to sit in Q2 and create a hypothesis of what will come out in Q3. It's a very detailed exercise we do every year, still observing what goes into play because that clearly has an impact on LGD, PD. Even with LGD, PD, and the PCR cover, the other variables are the GS3, GS2 stock as well as the write-offs and the settlement losses.
I reiterate that I don't see a hazard to the 1.7% cap in credit cost right now sitting here. Annual.
Annual. Yeah, perfect. That's helpful. Second is because you made a fleeting mention of diversification. Where do we see the non means share as the overall, as a share of overall AUM going forward, and besides SME or including SME.
Which will be.
Which portfolios will be the key? Thank you.
Yeah. Right now, you know, SME has grown from, you know, maybe a share of, it's been at 5% but it's growing at a YoY clip of let's say 12%. We also did some kind of edits in our SME geography strategy last quarter. SME is a new segment but overall I think from an asset category we continue in the wheels business to look at all opportunities of growth, over-indexed clearly on PV, tractor, used vehicle, and some segments of the CV segment. These are our mainstay businesses. SME is a new business and as I mentioned earlier, a very big category on the lending business is the mortgage business, which we currently participate through MRHSL, which is our HFC. We have plans to accelerate our participation in housing finance but we didn't want to do that without first setting the housing order.
That's why getting that organization and the mortgage to be in a respectable asset quality zone was the prime objective. Now that we have the mortgage business also under 3% GS3, we did share with you, we've got some good talent and we have equipped the teams now to look at mortgage as an important swap-in category for driving growth in the near future.
Great point, sir. Thank you so much for the explanation.
Thank you. Next question is from the line of Shubhranshu Mishra from Philip Capital. Please go ahead.
Hi now.
I'm sorry, your voice is sounding muffled. Can you use your handset mode, please?
Can you hear me better?
Not really. Can you try asking the question?
Hi, Raul. Good evening. Just wanted to understand the afterburn rate curve. How do we look at the commercial demand?
I'm sorry, I'm hardly able to hear you. I don't know whether. Operator, can you hear?
Thank you. Next question is from the line of Piran Engineer from CLSA. Please go ahead.
Yeah. Hi team. Congrats on the good set of numbers. Actually, I have one clarificatory question to ask on the trade advances. Did you say INR 600-INR 800 crores?
No. No. INR 6,800 crores.
INR 6,800.
Yeah. For the festive season.
Okay. Would the corresponding number be last quarter? Closer to the previous quarter?
Yeah. I'll have to pull that sense of the jump
. Yeah. Closer to INR 4,000.
Yeah. Okay. Okay. That clarifies it. You also to that question alluded key. This will be part of the passenger vehicle book.
No, no, no, no. This is separate book.
Yeah, it should be in others. I think [Rava] asked you about that calculation of repayment rate. I think the conclusion we got was that it's part of the passenger vehicle book.
When he said the book has grown stronger than the disbursements and therefore it means repayment rate is lower. I just wanted to check that.
No, I'm not able to get. What was the confusion?
The trade advance book of INR 6,800 crores is mark of others and not part of passenger vehicles.
Absolutely. If you're referring to page number 14. If you're referring to page number 14, it is part of the others with an asterisk.
Yeah, 14. Yeah. Okay, fair enough. That was. Okay, now getting on.
I'm sorry, you're sounding muffled.
Okay, am I better now?
Yes, please go ahead.
Okay, so just getting back to my questions. Firstly, you've done a good job on stage two and stage three in this first half. How do we think about this trajectory in the second half? Simply because in the past, you know, Mahindra Finance has been that the first half is bad and then the second half recovers because the first half was bad. Now, given that the first half is not so bad, is it fair to say that the recovery also will not be so sharp? You get what I'm trying to say.
See, I think we are trying to keep stability in mind. You're right. Because anytime if the base gets higher, then the recovery is from that higher base. This time our objective was to reduce the inter-quarter volatility. I think many things go into that.
One is the onboarding strategy, two is the collection strategy. At the end of the day we are not lending to super prime customers. We do lend to a lot of self-employed customers, customers who have cash flow mismatches. We will have to be on the ball in terms of our collection for the remainder part of the year. We can't lose sight of that. Having said that, I don't think everything is. No one can say that the environment is super rosy. There are still challenges. We're seeing unseasonal rains in different parts of the country. Within all these challenges our job is to make sure that we execute well and keep the GS2 plus GS3 rangebound. As we said, for us that number is more reflective of being below 10% GS2 plus GS3. That's the objective, to keep it at least across quarters.
Some quarters do end up being more challenging, especially quarter two. We at least feel reasonably happy with what the teams have achieved in quarter two, keeping it rangebound. That will be the objective to see Q3 and Q4 follow that trajectory, keep it rangebound and possibly go down in Q4. Q3 I don't think we'll be able to reduce very drastically, but Q4 definitely has more upside than Q3.
Understood. The second, cost of funds, now we've seen some improvement in the last quarter. Assuming no further rate cuts, how much further decline is possible?
I think fair to say Q2 was a good quarter because as I mentioned we have got certain benefits from the rates which are flowing down to us in our borrowing cost. As we start consuming more capital now, the INR 3,000 crores all came in in Q2.
That leverage also was lower as we see disbursements grew up. I think cost of funds will not really be a big beneficiary going forward.
Okay.
Thank you.
Thank you.
Next question is from the line of Prithviraj Patil from Investec. Please go ahead.
Yeah, hi. Thanks for the opportunity. My question is on the subsidiary. I just wanted to have a sense of whether the employee rationalization is complete at the housing subsidiary. Could you also throw some light on the ARC transaction there?
We continue to find more efficiency gains as we go ahead. As you would notice, it's already climbed down pretty steeply from, you know, exit of, I mean let's say H1 of last year we were at 6,300. We are down to 4,700. As we get into more growth in affordable housing, we've stopped doing, of course, as you know, the very small ticket rural housing finance or the rural home improvement loans. We don't see this number increasing for sure. We will try to get more and more efficiency. Can it go down a little further, maybe marginally lower.
The objective is to run a very efficient housing finance franchise. On the transaction, I won't go into the minute details but yes, this was a portfolio that was mostly a GS3 and written off portfolio which we got off our books at a price which, due to certain confidentiality, we can't disclose the exact price but we did provide for it fully. Hence, as you see, the net NPA number has not moved so much but the GS3 has come down reasonably well.
Okay. A follow up on the other subsidiary, the ID finance subsidiary. I just wanted to know what was the long-term strategic vision of entering into Sri Lanka and what's the split there between gold loan and finance?
See, when we look at overseas markets we generally follow where there is a stated, you know, capability for us to ride on the auto business like we do in the U.S. with the tractor business. In Sri Lanka, we went in because we had a strong Sealy business with the Mahindra & Mahindra group over there. Because of certain import restrictions, we had to diversify into gold just to make sure that we have a franchise which is able to leverage its participation there. It's about a 50/50 participation right now in gold and vehicle business. As you would see from the financials, it's an improving trend.
Thanks.
Thank you.
Thank you. We'll take our next question from the line of Kunal Shah from Citigroup. Please go ahead.
Yeah, a couple of questions. Firstly, with respect to write off, if we still see the write off quantum continues to be upwards of INR 400 crore. I think this is a number which you mentioned like you would want to create. How should we see this trend going forward, particularly in the second half and getting into FY 2027?
Yeah. Kunal, as the book grows also the number will be a percentage of the assets. As you know, while yes, it is higher than we possibly want it to be, overall within the credit cost of one point, this number should be between 1%- 1.2%. That's a number I think is a reasonable number for the business model that we run.
In some quarters we will try to dispose more assets which will flow through the end losses, right, because end loss is a combination of what we write off as well as settlement losses that we take in after selling the assets.
Sure. Secondly, on the growth guidance, you also indicated that there should be the positive effect of maybe they gained momentum plus maybe we might accelerate SME mortgages. Now looking at the traction in the second quarter which was more towards maybe the last month or maybe the last week, how should we look at the overall growth settling for FY 2026 now? Is it like rural buoyancy plus GST giving us more confidence to grow better?
Again, drawing from what the OEMs' commentary are also, and maybe I'll not go into specific minds of finance, but if you see before the GST 2.0 came into being, the guidance from the community, let's say from a passenger vehicle, was more closer to a kind of a 5% kind of a year-on-year growth. I think that number because of the momentum we are seeing in H2 passenger vehicles is pretty much now expected to, I would think, across OEMs be a more 12% growth in half year two versus a 4% growth in half year one. Which means at a blended rate there's 8% growth in passenger vehicles, I would think, versus what was 5% earlier before GST 2.0 came to be.
You know 40% of our book is in passenger vehicle, so we will ride that growth which is happening because we participate across OEMs and we also have a decent participation in the small car segment. Similarly, in the tractor, half year one was, and I may not see Mahindra Finance half year one as I just look at the wrong data and all, is more 10%. I think what volumes we are seeing here is half year two. My estimation is we could see more than 18 to 20% growth, which would mean a full year-on-year growth of 15%, and we are a major player there. The tractor growth by OEMs was earlier more in the 8%- 10% range, so there's a clear uptick there too. CD, I wouldn't comment so much because I don't think CD shares the same enthusiasm.
With the volume growth, of course, there'll be a value deflator. Overall, GS2 should kind of bring in more momentum to us, to a player like us, to see and give us more confidence on disbursement growth, which will flow into book growth eventually. Maybe while this quarter would still have the trade advances benefit as you indicated, INR 2,800 crore was the delta on a quarter-on-quarter basis. Otherwise, ex of debt, should we still see like 4 to 5% situation, sequential momentum coming through, I would be very confident getting into Q3 and Q4 at those levels. There will be some adjustments from the trade advance into adjusting for retail volumes. Even now, seeing the momentum even after Diwali into October and activity at many dealers, I do believe that Q3 will sustain disbursement.
Sure. Okay. Okay, thanks. All the best.
Thank you. Next question is from the line of [Jay Ditay] from Nirmal Bang Institutional Equities. Please go ahead. Hi sir, just again.
Just wanted some highlights. Can you just give us a split between your used TV vehicles versus your new TV vehicle disbursements?
See, I, just to be fair to the disclosures that we do, we can do it. We are doing a, you know, investor day kind of on November. We can take your acquisition. I just want to be fair that we give these disclosures not, you know, in a selective manner. I'm sorry, I'm not able to kind of give you that level of detailing right now.
Sure, no worries, sir.
Secondly, sir, one of your peers, they had highlighted there was.
There were few stretch pockets across the eastern and the northern regions.
Were you facing a similar kind of delinquencies there?
See, the disruption was very high in north and east with the unseasonal rains, and part of east was closed because of agitations in some states in Q2, specifically Assam. I would not dispute the fact that there were disruptions in north and east. It would have kind of led to some amount of stress in the GS2, GS3 build up. Again, collection teams have to manage within all these constraints.
Okay.
Okay, sure. That's it from my time. Thank you and all the best. Thank you.
Thank you. Next question is from the line of Harshit Toshniwal from Premji Invest. Please go ahead.
Hi sir. Sir, two questions actually. One is on the disbursement growth. If I specifically look at the PE segment itself.
Now can you be a bit louder please?
Yes. When you said that 12% is probably the volume growth which we see for most of the OEMs, but if I offset it with 5%- 6% of the price decline or basically the ticket size decline because of the GST, then would it be right to say that for us, and since we are already a large part of the market, the disbursement growth in passenger vehicles specifically crossing that 8%, 9% hurdle on a value basis is not going to be a realistic assumption. In that case, we just wanted to get your sense that even if the volume growth remains, is the disbursement rate on a year-on-year basis, will we see that high disbursement growth getting committed?
That was the first question. The second question was that when I look at the 1.7% credit cost guidance now in FY 2025, we saw some bit of ECL model showing lower coverage that hinders reaching that 1.7%, but if I look at practically for a 10% GS2 plus GS3 book, our credit cost on a more steady state basis should be around 2%. Is it that for a 55.5% owned, if you want to fix up a 55% PCR and then move around, what is a sustainable credit cost? Then is 1.7% more in the lower end of the guidance, sir?
No. First, I just want to correct one of your points. I'll go to the disbursement first, and I hope my collection teams are not hearing you on the 2% target for the credit cost.
Last year actually was 1.3%, not 1.7%, and you're right, last year the credit cost was lower because of the PCR release which we got, and hence I said for a business model like ours, 1% is better, is a more reasonable number to mimic our business model considering last year was an aberration with the provision release that we got. Coming to your first question on disbursements, I don't dispute the fact that there will be a deflator because of the price decrease, and an overall PV growth in H2 will come with that price deflator. I'm not commenting on whether that same 8% will flow through our disbursement growth. It's very early to give a full H2 guidance. I just wanted to give you a sense of where we think the H2 volume growth could be because of the GST benefit.
At least what we've seen playing out and somewhere you can come in is from the festive season we're seeing both players, we're seeing new people coming in for the entry level vehicles and we're seeing a premiumization play also for the passenger vehicle community. It's a little early to comment on the full year but something which you want to add, please come to the price deflator point itself. What has been the average price deflator which you've seen? If I even look at the Q2 FY 2026, if our disbursement growth is 1% on a YoY basis, how much would be the negative impact of price deflator? Probably one, right? Because Q2 we just had seven days of September, I don't think you can read anything into Q2 with the festival and the GST impact. Very early to attribute a number.
We'll have to give it a good two quarters' time to really, you know, understand the impact coming out of it. Because two, three playbooks are playing out. One, like Raul said, customers are also upgrading to the higher version of the vehicle depending on their budget. That is also adding, while it's not adding to overall cost, but it does reduce the deflator effect that is there. Second, I think we are yet to see all the fence sitters coming in and starting to buy vehicles, which we will see over a period of the next two quarters. Third, depending on the way the business is happening, you may see further reduction or reduction of discounts, etc.
in the market, which means that the net price to the customer also is retained and it doesn't go down the way it went down in the last two quarters of last year. I think it's a bit too early to give a total understanding of where it may go. We should have to watch it. The bigger and the overall impact, we should not look at this GST benefit as what's happening in quarter three or quarter four, but look at it scattered over the next one and a half years' time to see is it overall going to improve the automobile and passenger vehicle market, and my vote there would go to say yes, it would, and that's what should help us and help everyone in terms of the link.
Fair point, fair point sir.
One last thing was on the, so I think if I read it correctly, that last one, one and a half years we have put a lot of efforts in building credit score models and basically improving our data analytics pattern. Now if I want to see that, it's conversion into either of two forms: one, SME growing much faster because of the base, and probably last quarter we did some realignment which held back the growth. This quarter I was expecting the SME to be doing much better. The second is that I agree that a few years we have stayed away from unsecured. Do you think that if the credit score models are now defined enough, then is it the right time for us to also explore that as a segment to give us that growth lever beyond just the traditional vehicle business which we are running?
Just trying to understand that for us, levers to improve the growth, like either in doing SME lab or trying to explore unsecured with our new credit models. Am I thinking on right lines or is it the right way to even think?
Yeah, I won't get into specific choices of business. All I can say is that for a franchise like ours, we do believe that if we don't find ways to get to a 15% at least minimum casual disbursement growth, we won't be doing justice, at least to our being in the NBFC leading community. Right now, the disbursement growth with the choices are slightly lower, but there is a stated aspiration to find a way to get to at least on a steady state CAGR of 15%.
We are much lower right now, but with the plans that we have and the segments that we operate, there is an intent to get to that medium term CAGR number.
Okay.
Okay, perfect. Thanks a lot and all the best. Thank you.
Thank you. Ladies and gentlemen, to ask a question, please press star and one on your phone. Take our next question from the line of Prithviraj Patil from Investec. Please go ahead.
Yeah, so my question is on the 44% floating borrowings that we have. I just wanted to know if we've witnessed all the repo rate cut benefits on this borrowing or like going forward will be like is there any rate cut expected here on the borrowing?
I'll hand it over to my CFO. I just want to say we don't want to get into anybody's shoes and predict rate cuts, etc. My CFO is very close to the market so he'll be able to give you a better reply.
Yeah, so look at the, as Raul said that we don't want to speculate about the rate cut but as of now whatever borrowings which we had done in the, like, you know, if you look at the slide number 29, you can see that our largest share of the borrowing has come from the CPITD traps as well as securitization pool has gone up and these two modes have given us a lot of competitive edge towards lowering our cost of borrowing. I think these are the instruments where we have not utilized to the fullest extent. Going forward also these two instruments will be the focus for us to raise funds and that will give us continued advantage towards lowering our cost of fund. Thank you.
What I wanted to ask is since we have 44% floating rate borrowing, I just wanted to know whether 100% of the repo benefit is factored into that in our COF right now or can we expect the cost to go lower?
41% of floating rate borrowing consists of MCLR borrowings as well as repo and the TBILS borrowing. If you look at the MCLR borrowings, that rate might not have been fully transmitted by the banks here. So far as TBILS and the repo is concerned, those borrowings completely captured the repo rate benefits as of now.
Okay, thank you, thank you.
Thank you ladies and gentlemen. That was the last question for today. I now hand the conference back to management for closing comments. Over to you, sir.
Yeah, no, thank you Axis team. Thank you Praveen for hosting us and thank you everyone for joining the call. I know it's late, hopefully we were able to provide you with the details and of course you would have seen the results and details earlier. I think overall, if I were to say in reflection of the quarter gone by and of course looking at the future with aided and more optimism considering specific benefits that a majority in vehicle financer like us stands to benefit, we do look at the first half year gone by reasonably well.
What's encouraging for us is that the investments that we have made, whether it is to make sure that the stability of the asset quality holds and also make sure that we find ways to augment higher margins through both fee-based income as well as continued efficiency in pricing and cost of funds, many of these are playing out. We also look forward to executing well in quarter three and quarter four with writing the implementation initial momentum that we have gained in the later half of Q2. We remain focused on the input metrics which will finally deliver financial metrics. Thank you everyone and thank you again and wishing all of you. We didn't start by wishing you but yet the festive season just got over. Related festive wishes to everybody.
Thank you, thank you on behalf of Axis Capital. That concludes this conference. Thank you for joining us and you may now disconnect your lines.