India NBFCs CV Lending- A word of caution ::JPMorgan

Commercial Vehicle lending has become a key growth driver for the
business of most Auto NBFCs. However much of this growth seems to be
driven by Small (or Light) CV’s. As per a pool analysis of such loans
(source: India Ratings) LCV loans have potential for higher
delinquencies given weaker credit profile of borrowers who seek low
ticket size loans. A further increase in input costs has not been matched by
a corresponding increase in freight rates thus putting pressure on business
economics.

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 NPAs at cyclical or structural low? - Most auto NBFCs have not yet
reported any big increase in NPAs. This, despite a cloudy macro for CV
business. While this to some extent points to improved lending standards
(LTV ratios have not moved up in the past two years), clearly write-off
levels remain below cycle averages. For some NBFCs heady growth
might have meant that a part of the book is unseasoned and hence
maybe a bit too early to take a call that credit costs will remain at current
low levels.
 Underlying business outlook still “uncertain”- Underlying CV
industry faces an "uncertain" outlook going into 2013. Headwinds of
higher rates, input costs etc have meant that M&HCV sales have come
off 33% Y/Y. LCV still holds out some hope growing at 10%. However,
as highlighted above, this segment is vulnerable. Industry probably
benefits from a weaker base going into 2013 but that is hardly a source of
comfort in our view. Recent pick up in IIP is encouraging but these are
still early days to take a view that CV numbers will rebound.
 Credit costs not growth, key driver of stock performance hereon-
Most auto NBFCs have seen a sharp spike in stock performance going up
20-30% in the last three months. This has been in driven by 1. Reduced
wholesale funding costs 2. Improvement in monsoons vs. the initial scare
and 3. Expectations of some NBFCs getting a “Bank licence”. However
at current valuations a lot of these positives seem to be priced in esp.
for Auto NBFCs. While we note that 2H is seasonally better than 1H
both for credit costs and growth, any potential increase in credit costs
could cause de-rating. We see better risk reward with LICHF (OW).