Mr. Akshay Ashok - Research Analyst - Insitutional Equities at Prabhudas Lilladher
As pandemic comes to an end, NBFC's are expected to press hard on the growth pedal and we expect NBFC's under our coverage universe to report avg of 6.3% QoQ AUM growth. NBFC's in Q3 saw increased GNPA levels, due to new RBI norms. The timeline for implementation has been extended to Sept'22 but most companies have calculated 3Q GNPA's based on new norms. We expect better asset quality as there has been pick-up in collections across board. Reduction in stress along with sufficient provisioning in Q322 should lead to lower credit cost across board which will aid profitability.
We believe MSME, MFIs and CV financing business segments are out of woods with improvement in customer cash flows. Asset quality stress should ease as collection efficiencies have even crossed 100% in many companies. Secured lending business such as gold and housing finance companies can see margin pressure, due to increased competition. We reckon provisioning has peaked out and credit costs should likely return to pre-covid levels in coming quarters.
With strong rural income we expect, vehicle financiers like SHTF, MMFS and CIFC to show improvement in AUM growth on a QoQ basis. We draw comfort in players with strong parentage, market leadership, healthy capital and provision buffers. We rate Bajaj Finance, Manappuram and Shriram Transport Finance as top picks in NBFC space.
- Loans to record high single to double digit growth: Channel checks suggested that disbursements trend continued to remain robust with opening up of the economy. For our coverage universe, aggregate loans should report healthy 13%/6.3% growth on YoY/QoQ basis respectively. BAF with 29%YoY growth followed by MGFL at 23% will drive loan aggregates for the quarter.
- Margins to see improvement: With disbursals picking-up, and interest rate rising we see meaningful rise in NII across our coverage companies. Resultantly, we expect aggregate NIMs to show 104/78bps improvement YoY/QoQ basis respectively. CIFC followed by MMFS should witness highest sequential NIM expansion.
- Credit costs decline; NPA's to reduce: New RBI norms on NPA recognition and PCA framework guidelines have already been implemented in Q3. With collections picking up and provision buffers in place, the ultimate credit loss is likely to stand lower than previous quarter and hence we expect aggregate credit costs to decline by 264 bps QoQ for our coverage universe. MMFS from our coverage universe, to report highest order credit costs increase of 9bps QoQ. As far as gross NPAs are concerned, they are expected to rise ~429 bps YoY but fall by 311bps QoQ. with auto financiers reporting maximum QoQ improvement in asset quality. Amongst the coverage universe, we expect MMFS to report GNPAs at 10% and MGFL and MUTH at 1.1-0.56% respectively.
- CV financers to benefit; We expect rural income to rise and last few months have seen strong vehicle sales, CV sales have been strong in the month of January and February. Month of Feb'22 and Jan'22 saw sale of 63,797 units (7.41% yoy growth) and 67,763 units (20.52% yoy growth). Light Commercial Vehicles(LCV) sales which is an indicator of revival in economic activity in rural areas also saw strong growth with sale of 37,095 units (5.67% yoy growth) and 40,343 units (16.46% yoy growth) in Feb'22 and Jan'22 respectively.
Our Top Picks: With pandemic coming to an end and economy opening up, Q4 can be extremely strong for NBFC's across the board. Companies are expected show strong QoQ AUM growth and guidance is expected to be very strong. NBFCs' aggregate earnings are expected to inch higher on QoQ basis on better loan growth/lower provisioning. We like SHTF, CIFC and MGFL from coverage universe. We rate BAF, SHTF and MGFL as top picks. On expectations of likely uptick rural demand, we rate MMFS as "U/R" (Reduce earlier).
SHTF (BUY): The commercial vehicle segment has rebounded sharply as seen by March volume numbers of M&M, Tata motors, Eicher & Volvo JV. Diesel price hike should not majorly affect the sentiment as customers are shifting to CNG. M&LCVs and HCVs financing forms 26.45% and 37.73% of SHTF AUM and should show strong growth in Q4 : We expect SHTF to end FY22 on a strong note with closing AUM of INR 128,323 crores (+9.5%YoY/ +2.99% QoQ). This will be the best QoQ AUM growth shown in several quarters and the company is on track to start delivering double digit YoY AUM growth from Q1FY23. We rate BUY on SHTF with a price target of Rs 1,452
Bajaj Finance (BUY): Bajaj Finance is expected to post the best YoY AUM growth of 29% amongst all coverage companies. Auto finance (6% of AUM) business can surprise positively in this quarter after de-growth in the past few quarters. We can see margin improvement sequentially on improving NII and reduction in liquidity We recommend BUY with a price target of Rs 8953. (Being valued as a profitable fintech lender, we maintain our multiple at 9.4x Sep'23E and our "BUY" rating)
MGFL (BUY): We expect MGFL to show strong QoQ AUM growth of 10% led by gold and microfinance loans. OPEX that saw a rise in Q3 is expected to moderate and asset quality is said to improve. Sequential margins are likely to slightly moderate as company chases higher gold loan AUM growth. We rate BUY on MGFL (Accumulate earlier) given attractive valuations of .9x FY23 P/ABV