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NBFCs Q3FY21 Results Preview - Micro headwinds > Macro tailwinds - HDFC Securities

Posted On: 2021-01-19 05:10:07 (Time Zone: Arizona, USA)

Ms. Krishnan ASV, Institutional Research Analyst, HDFC Securities

Our coverage universe is likely to clock a 3.4/1.9% sequential growth in NII/PPOP. As with banks, GS-III will be of little relevance in light of the SC stay and the focus will be on pro forma metrics. On a sequential basis, NBFCs (including HFCs) are likely to see margins reflate on the back of a fall in funding costs and lower drag from excess liquidity buffers. Disbursals are likely to rise materially, on a QoQ basis, as underlying asset sales revive in line with economic activity.

We have raised our FY22/23E earnings estimates across our coverage by 12.0/13.1%, as we forecast a sustained improvement in metrics around growth, credit losses and margins. However, we also remain sanguine of the imminent reforms in the regulatory, supervisory and governance architecture of large NBFCs (and HFCs).

We upgrade CREDAG to BUY (target price of Rs 851) on the back of stable rural macros and an easier funding environment, which is likely to help restore the company to pre-COVID-19 growth levels earlier than previously anticipated. Despite lofty valuations, we maintain BUY on CIFC (target price Rs 486) and ADD on BAF (target price Rs 4,745) due to improving visibility on growth and RoE metrics.

GS-II a key monitorable; collections to improve: As with banks, reported GS-III for NBFCs could remain stable or decline on account of the impact of the recent SC stay on NPA marking. In light of this, pro forma numbers will assume greater relevance. Investors should watch for the movement within GS-II to assess potential inflows into GS-III. NBFCs are likely to report a sustained improvement in collection efficiencies, except for select segments (school buses, taxis and HCVs).

Provisions to remain elevated: Despite most asset financiers in our coverage universe having built significant provision buffers and the expected improvement in collections, we continue to conservatively model for elevated provisions in 2HFY21. With the exception of BAF (-13.3%), we expect a significant rise in provisions sequentially (~2x).

Improving disbursal momentum: Asset and home financiers will have benefited from rising sales in underlying assets. Consequently, NBFCs within our coverage universe are likely to register a significant sequential uptick in disbursals (closing in on pre-COVID-19 levels).

Falling CoF to buoy margins: (1) Reduction in CoF (11bps QoQ blended across our coverage) driven by the re-pricing of the liabilities side and benign interest rates and (2) reduction in liquidity buffers with increase in business volumes, are likely to drive margin expansion, at least on a sequential basis across most of our coverage companies. This holds true particularly for large players with fixed rate books within our coverage such as BAF and CIFC.

Regulatory headwinds ahead: In recent times, the RBI has hinted at introducing reforms in the regulatory, supervisory and governance architecture for large NBFCs (and HFCs) to enhance the stability of the broader financial system. We believe such structural measures aimed at strengthening the financial system would usually entail a period of consolidation and short-term dislocation in ROA metrics.

Source: Equity Bulls

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