Some speed breakers ahead for retail-focussed NBFCs
Defying macro-economic headwinds such as economic slowdown, slowing consumer demand and high-interest rate environment, some of the large retail-focussed non-banking financing companies (NBFCs) like M&M Financial Services, Bajaj Finance, Muthoot Finance and Shriram City Union have delivered robust performance in FY12 and the quarter ended 30th June 2012. The road ahead, however, may not be as smooth for them and the industry.
Suman Chowdhury, Director, CRISIL Ratings believes, “Due to the semi-urban and rural orientation in the business profile of the retail NBFCs, they have continued to show a strong growth in their disbursements in 2011-12 and the first quarter of current financial year. At an industry level, CRISIL estimates the growth in this period to be at 25-30 per cent. This growth rate is expected to slow down to 15-20 per cent in the next 12 months. The key reasons for the same are a) slowing sales of passenger car, heavy- and medium-commercial vehicle, and tractor segments and b) expectation of cautious approach in lending due to weaker economic environment." Chowdhury also expects industry’s non-performing assets (NPAs) to rise in FY13.
However, most of these leading NBFCs seem to be confident of delivering good growth in FY13 while analysts too don’t seem to be majorly worried though they are a little cautious. Due to strong traction in the consumer finance business along with new products in the lifestyle financing segment, analysts expect Bajaj Finance to deliver 20-30 per cent growth in income and profits in FY13. For M&M Financial, its diversified presence and strong earnings visibility stands it in good stead. “While we remain cautious given the weak monsoon, diversification in product and geography mix with pure farm income dependent customers at less than 15 per cent should hold asset quality in good stead", believes Kunal Shah of Edelweiss Securities who has a buy on the stock with a target price of Rs 802.
Muthoot Finance, however, is expected be hit by stricter loan to value (LTV) norms in FY13, but analysts believe loan growth should pick-up in FY14. “We can expect a 10-15 per cent growth in the AUMs by the third and fourth quarter. If that happens, profit also should increase proportionately by about 10-15 per cent", says Muthoot Managing Director George Alexander. The stock, which largely captures the expected slowdown, is likely to lag in the near-term. Though Shriram City Union has delivered strong growth and asset quality trends on a sustained basis, any slowdown in rural economy and a poor monsoon remain key risks.
Barring Muthoot, the stocks of other three firms partly captures the medium-term positives and are hovering closer to their historical highs, indicating that any shortfall in performance (versus expectations) could impact valuations.
June quarter: Auto, consumer drive loan growth
While loan growth remained sluggish sequentially (in-line with industry wide trend), the metric continued to be robust on a year-on-year basis. Gold loans, consumer durables financing and two and three wheeler financing fuelled strong disbursements for these players. However, commercial vehicle (CV) and construction equipment financing witnessed sluggish growth for another quarter. M&M Financial's, auto/utility vehicles (up 31 per cent- highest growth of this segment since December 2010 quarter) and cars business both registered over 25 per cent growth, fuelling topline expansion. Its management is keeping a close watch on monsoons and believes year-end recoveries will be hit due to weak monsoons. Analysts expect the company to clock loan growth of 28.5 per cent in FY13.
Bajaj Finance gained from strong traction in its consumer durables (high replacement demand for air conditioners) as well as the small and medium enterprises (SME) businesses. However, construction equipment business contracted. The Bajaj Finance management expects to clock in loan growth of 25-30 per cent this fiscal.
Despite the stricter norms imposed by RBI in April 2012, curtailing the LTV of gold lenders, both Muthoot Finance and Shriram City Union Finance (gold loans form 40 per cent of its total assets) continued to post robust loan growth of 41 per cent and 23 per cent, respectively. Notably, analysts remain sceptical on the sustainability of Muthoot's loan growth for this fiscal in wake of the new LTV norms and are factoring in an increase of just 1.9 per cent.
Margins steady, asset quality sees some pressure
The trend on the net interest margin (NIM) front remained mixed. While strong pricing power (in the consumer durables segment) enabled Bajaj Finance to increase NIMs by 70 basis points sequentially, lower cost of funds led to stable NIMs for Shriram and Muthoot Finance. M&M Financial though witnessed a lower than anticipated contraction in NIMs, thanks to higher assignments and write back of excess provisions. Falling interest rates will enable both M&M Financial and Shriram to hold on to their NIMs going forward. Removal of priority sector benefits and higher funding costs will hit Muthoot’s NIMs this fiscal, believe analysts.
These NBFCs asset quality is expected to remain largely stable, though with some upward bias. "The average GNPAs (gross non-performing assets) in the retail NBFC segment is expected to increase to around 2 per cent by March 2013, from 1.6 per cent as on March 2012," believes Chowdhury.
Bajaj Finance seems to be better placed than its peers. At 0.10 per cent, its net non-performing assets (NPAs) were lowest in the past five years. This is driven by reducing loss rates across its various segments. Analysts expect Bajaj Finance to maintain its asset quality at current levels in FY13. Shriram too witnessed an improvement in its asset quality with gross NPAs contracting for the fourth quarter in a row. In FY13 though, a poor monsoon could rub off negatively on the asset quality of Shriram as well as M&M Financial. Notably, M&M Financial witnessed a higher than expected rise in Gross NPA levels, indicating towards some weakness on this front. Muthoot witnessed an increase in NPA in June quarter led by lower LTVs and low appreciation in gold prices. Analysts believe its NPAs will move up going forward. “We are raising our NPL provision estimate substantially and now factor about 1.5 per cent gross NPA (from 0.5 per cent earlier). High gold prices and lower LTV in the new regime likely imply that eventual losses will be low", believe Nischint Chawathe, M.B. Mahesh and Geetika Gupta of Kotak Institutional Equities.