Non-Banking Finance Companies Mission possible: The rural protocol :: Anand Rathi Research

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Non-Banking Finance Companies
Mission possible: The rural protocol
The operating environment of retail NBFCs is likely to improve over
the next 12 months, led by an expected dip in inflation, easing
monetary policy stance and falling wholesale borrowing rates.
Regulatory issues, barring priority-sector status, are near finalization
and are unlikely to have a material impact on earnings. In addition, our
NBFC coverage universe is strategically poised to cash in on rising
rural demand. At current valuations, the risk-reward appears favourable
for these stocks. We initiate coverage on the sector with a positive
stance. Top picks: M&M Financial Services (MMFS) and Shriram City
Union Finance (SCUF).
 Macro headwinds to ease. We expect the economic environment to
improve, led by falling inflation (estimated to soften to 7% by Mar ’12),
easing monetary policy stance (estimated ~100bps CRR cut by Mar ’12) and
falling wholesale borrowing rates. This is likely to drive growth in NBFCs.
 Regulatory issues unlikely to impact earnings. Regulatory changes
regarding capital adequacy, NPA recognition norms and securitization are
unlikely to materially impact the earnings of our NBFC universe. We see
little possibility of a complete curb on priority sector status on
securitization, given: 1) the importance of lending to under-banked
regions/credit-starved sections of society and 2) the necessity of meeting
priority-sector lending criteria for foreign/small private-sector banks.
 Strategically poised to cater to rising rural demand. Our coverage
universe of retail NBFCs has strong parentage and several decades of
expertise. The NBFCs have built large-scale franchises and have
improved loan origination and risk management processes. They are now
strategically placed to reap the benefit of greater rural demand due to
rising food prices, high minimum support prices and rising government
expenditure on rural projects and employment-generating schemes.
 Top picks: MMFS (Buy; TP: `845) & SCUF (Buy; TP: `680). Our
preference is for wholesale funded retail NBFCs (backed by secured assets)
over banks and infrastructure NBFCs. At current valuations, the risk-reward
favours NBFCs. We initiate coverage on Magma (Buy; TP: `80), SCUF (Buy;
TP: `680), Chola Finance (Buy; TP: `181) and Bajaj Finance (Sell; TP: `712).