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India Retail NBFCs
Present perfect, future tense
Initiate with a bearish outlook on the sector
We initiate on three retail non-bank financial companies (retail NBFCs) with a
bearish and an anti-consensus view on the sector. We initiate on Shriram
Transport (SHTF) with a Neutral rating, while we rate LIC Housing (LICHF) and
Mahindra Finance (MMFS) as Underperform. Our earnings estimates are ~10-
15% below consensus with target prices 25-38% below.
Operational outlook turns for the worse
Tougher macro. The last two years have seen strong demand for the NBFC
sector driven by a rebounding economy and low interest rates. RBI expects real
GDP growth to come down to 8% in FY12 from 8.5% in FY11 (with a survey by
RBI of professional forecasters placing a lower-end estimate of 7.5%). RBI has
already hiked interest rates by 125bp YTD, and we expect another 50bp hike in
FY12. This should result in slower loan growth, shrinking margins and higher
provisioning for our three companies.
ƒ Slower loan growth. Higher base, slower demand and higher rates are likely
to reduce auto sales growth to an average of 15% YoY in FY11-13E from
28% YoY in FY09-11, impacting auto financing adversely. For SHTF, focused
on commercial vehicle financing, we expect slower average AUM growth of
~13% YoY for FY11-13E vs 24% YoY in FY09-11. For MMFS, focused on
auto lending, average AUM growth should slow to 20% YoY from 33%. LIC
Housing with its focus on mortgages should see more resilient loan growth,
but still slow to 27% YoY from ~36% YoY.
ƒ Shrinking margins. We expect NIMs will shrink by 25-30bp YoY for the three
companies due to higher cost of funds. For LIC Housing, tough competition is
a bigger variable. For SHTF and MMFS, lower securitisation should also raise
cost of funds.
ƒ Higher provisioning. We expect incremental stress on asset quality to come
through and credit costs to increase. For SHTF and MMFS, we build an
increase in credit costs from ~150bp in FY11 to ~170bp in FY13, for LICHF
from virtually 0 to ~15bp. LICHF should also be hit by higher, regulator-driven,
general provisions.
Regulatory headwinds – more to come
We believe regulatory norms for NBFCs could be made tighter, possibly by this
July. We expect tighter supervision and consequently lower volumes of loan sales
by SHTF and MMFS to banks. A 20% cut in assignment volumes will increase cost
of funds by 4-7bp. The tier I ratio would be lowered 104bp for SHTF and 23bp for
MMFS. A stoppage of sale could be much more severe, but it is not our base case.
RBI could also mandate credit enhancements to be subtracted from capital, thus
lowering Tier I and sustainable ROEs due to lower leverage.
Valuation does not factor in the headwinds
With a demand slowdown and profitability under pressure, stocks should
underperform. There is an 80% relationship between auto sales and MMFS’ and
SHTF’s share price performance. Valuations are still ~15% above historical
averages for MMFS and SHTF and 54% above for LICHF, and stocks could derate further given cyclical headwinds and regulatory overhang. Key risks to our
thesis would be GDP growth being better than expected, spreads holding, and
asset quality remaining as good as it is currently
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Retail NBFCs
Present perfect, future tense
Initiate with a bearish outlook on the sector
We initiate on three retail non-bank financial companies (retail NBFCs) with a
bearish and an anti-consensus view on the sector. We initiate on Shriram
Transport (SHTF) with a Neutral rating, while we rate LIC Housing (LICHF) and
Mahindra Finance (MMFS) as Underperform. Our earnings estimates are ~10-
15% below consensus with target prices 25-38% below.
Operational outlook turns for the worse
Tougher macro. The last two years have seen strong demand for the NBFC
sector driven by a rebounding economy and low interest rates. RBI expects real
GDP growth to come down to 8% in FY12 from 8.5% in FY11 (with a survey by
RBI of professional forecasters placing a lower-end estimate of 7.5%). RBI has
already hiked interest rates by 125bp YTD, and we expect another 50bp hike in
FY12. This should result in slower loan growth, shrinking margins and higher
provisioning for our three companies.
ƒ Slower loan growth. Higher base, slower demand and higher rates are likely
to reduce auto sales growth to an average of 15% YoY in FY11-13E from
28% YoY in FY09-11, impacting auto financing adversely. For SHTF, focused
on commercial vehicle financing, we expect slower average AUM growth of
~13% YoY for FY11-13E vs 24% YoY in FY09-11. For MMFS, focused on
auto lending, average AUM growth should slow to 20% YoY from 33%. LIC
Housing with its focus on mortgages should see more resilient loan growth,
but still slow to 27% YoY from ~36% YoY.
ƒ Shrinking margins. We expect NIMs will shrink by 25-30bp YoY for the three
companies due to higher cost of funds. For LIC Housing, tough competition is
a bigger variable. For SHTF and MMFS, lower securitisation should also raise
cost of funds.
ƒ Higher provisioning. We expect incremental stress on asset quality to come
through and credit costs to increase. For SHTF and MMFS, we build an
increase in credit costs from ~150bp in FY11 to ~170bp in FY13, for LICHF
from virtually 0 to ~15bp. LICHF should also be hit by higher, regulator-driven,
general provisions.
Regulatory headwinds – more to come
We believe regulatory norms for NBFCs could be made tighter, possibly by this
July. We expect tighter supervision and consequently lower volumes of loan sales
by SHTF and MMFS to banks. A 20% cut in assignment volumes will increase cost
of funds by 4-7bp. The tier I ratio would be lowered 104bp for SHTF and 23bp for
MMFS. A stoppage of sale could be much more severe, but it is not our base case.
RBI could also mandate credit enhancements to be subtracted from capital, thus
lowering Tier I and sustainable ROEs due to lower leverage.
Valuation does not factor in the headwinds
With a demand slowdown and profitability under pressure, stocks should
underperform. There is an 80% relationship between auto sales and MMFS’ and
SHTF’s share price performance. Valuations are still ~15% above historical
averages for MMFS and SHTF and 54% above for LICHF, and stocks could derate further given cyclical headwinds and regulatory overhang. Key risks to our
thesis would be GDP growth being better than expected, spreads holding, and
asset quality remaining as good as it is currently
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