We recently met with the managements of a number of NBFCs (non-bank financial companies) to take stock of growth, impact of RBI reversal of MSF rates and progress on sector-specific issues.
Housing still the best bet: Housing finance continues to deliver better than vehicle and infrastructure finance. While macro has improved marginally, growth outlook remains challenging for most of them. Housing continues to grow at 15-20% CAGR (compound annual growth rate) for the system and HDFC and LICHF (LIC housing Finance) continue to penetrate deeper for growth and to offset the ongoing slowdown of Mumbai and Delhi. Versus this, vehicle sales remain subdued. While SHTF (Shriram Transport Finance) expects new CV sales to remain slow for another 12 months, MMFS (M&M Financial Services) is seeing incremental slowdown in rural markets. Infrastructure space has turned slightly positive with FRPs being signed, though incremental capex is a long way off and restructuring will still happen over the next few quarters.
Stable margins: With RBI hiking repo by 50bps and another 25bps likely (as per our economist), funding costs will remain elevated. However, most NBFCs had upped lending rates by c50bps in
Aug-Sept and so margins should remain stable.
Vs banks: It’s a mixed bag. While NBFCs have delivered better growth than private banks, only HDFC and MMFS have been able to hold on to their profitability. Going forward, however, SHTF and LICHF margins have bottomed with limited asset quality concerns, while credit risks for banks are rising. IFCs remain the weakest space among all of them.
We simplify our valuation methodology from the blended approach to a singlestage Gordon Growth Model based on medium-term RoE weighted by base, bull and bear scenarios. This is to bring our valuation methodology in line with that of our banks coverage.
Preferred plays are HDFC Ltd, Shriram Transport Finance Company Ltd and LIC Housing Finance Ltd: We continue to prefer stocks with lower growth and earnings’ volatility and attractive valuations. Housing finance companies continue to outscore other NBFCs.
Gauging Q3: It was a challenging H1FY14 in the wake of weakening domestic growth, inflation and currency concerns. RBI had to resort to a tough monetary policy stance, leading to a spike in short-term rates and credit demand shifting from NCDs to banks. NBFC was a very tough space to be in. Not only their funding cost spiked, but sector-specific issues threatened