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Indian Financial Services
RBI: NBFCs / new Bk license-
The good, bad and not so ugly
„Recommendations on NBFC sector; Draft on new Bk license
RBI published a report on working group recommendations on issues and
concerns in the NBFC sector, a group led by Ms. Usha Thorat. Also, RBI has
come out with revised ‘draft guidelines’ on new bank licenses.
Recos. on new license; Who / How many?; Almost all qualify
RBI has come out with revised draft guidelines on new bank licenses. A precondition is that all entities / groups in private sector / controlled by residents must
have a 10-year track record. In contrast, companies having income / assets of
10% or more (last 3 years) from real estate / broking would not qualify. Minimum
capital required is Rs5bn. Foreign holdings may be capped at 49% (vs. 74% now)
for the first 5 years. Further, 25% of branches should be in unbanked centers.
Existing NBFCs, if considered eligible, may be permitted to either promote a new
bank or convert themselves into banks. Almost all groups / NBFCs may qualify!
Recos. for NBFC sector; moving toward parity with banks
The key recos. include a) higher Tier I ratio of 12%, b) revision in the timeline for
classification in NPA to 90 days from current 180/360 days, c) introduction of
mandated proportion of G Sec / Cash with RBI, d) NBFCs to be covered under
SARFESI Act and e) hike in stand=alone NBFCs’ risk-weight to comm. real estate
and capital market exp. The aim of recommendations appears to be bringing
parity in regulating NBFCs and banks, and reducing regulatory arbitrage.
12% Tier 1 for NBFCs; NBFCs well placed; HFCs out of ambit
The committee has also recommended that NBFCs maintain a minimum Tier 1 of
12% (vs. 7.5% now, 10% for IFCs; total at 15% now), but we estimate that most
NBFCs are likely to see their Tier 1 still at +12% (FY14), although leveraging
capabilities for NBFCs are likely to stand reduced. HFCs (HDFC Ltd. and LIC HFC)
are out of this ambit, as they are Housing Fin. cooompanies regulated by the National
Housing Board and their CAR required stands at 12% now (vs. 15% total for others).
NPL recognition norms could hurt Infra. Finco’s / Shriram
Power Fincos (PFC, REC), IDFC, Shriram and Manappuram currently classify
NPLs under 180-day norms. Only Indiabulls Fin. and R-Cap follow 90-day norms.
While Power Fincos / IDFC have low NPLs as of now, PFC / REC could have to
provide for on standard assets (~25bps), which could hurt their earnings in the
medium term. But our FY12/13 earnings already factor this in and, if implemented,
govt.-owned NBFCs (PFC / REC) would provision in a phased manner, which
could cushion earnings impact. IDFC already does provide ad hoc 1% of
disbursements as std. asset prov. Shriram could see NPLs more than doubling (to
+5.3-5.5%) from present and prov. cover come-off (82% now), but they could also
be allowed to do so in a phased manner. Assuming the worst case, if not in a
phased manner, then the impact on FY13 earnings for Shriram could be +3-5%
Price objective basis & risk
HDFC (HGDFF)
We set our PO at Rs800 to factor in 1) overall growth momentum sustaining,
especially in retail and 2) we believe HDFC is likely to deliver RoEs of +23% (prewarrants) on profit growth of 21/20% in FY12/13. Our PO is based on a premium
to the Gordon model theory. Moreover, we believe HDFC being a quality
defensive growth stock, valuations for the stock tend to be more PE led than BV
led. Hence, the stock, trading at 23x FY11 earnings (adj. for subs), can continue
to trade at similar multiples 1-year out, given profit growth of +21/20% in FY12/13.
We think there may be upside to our SOTP (Rs166/shr), especially from HDFC
Bk (expanding distribution and market share) and life insurance. A sharp rise in
NPLs and an inability to maintain growth are risks to our price objective.
IndiaBulls Financial Services (IBLFF)
We set our PO at Rs240. We believe stock trading at 1.1x FY12 adj. book can
trade up to 1.5x FY12 adj. book given 1) earnings growth of +25% over FY12/13,
2) RoEs inching towards 20% levels vs. <17% in FY11, RoAs sustaining at +3.5%
and, 3) asset quality manageable (net <0.5%). Our PO implies target P/E of 8.0x.
PO is maintained despite earnings increase cause we are already pegging the
PO at +10-15% premium to Gordon theory multiples (RoE at 19% and CoE at
14%) factoring in rebound in earnings trajectory and business momentum. Risks
are a very strong business growth leading to a spike in NPLs which could hurt
earnings momentum and a sharp rise in wholesale borrowing costs can lead to
spread compression.
Infrastruct Dev (IFDFF)
We value IDFC on a sum-of-the-parts approach resulting in an aggregate value of
Rs134/share. Valuing its core infrastructure lending business at +1.4-1.5x FY13E
book on a appro. 15% core ROE for a value of Rs98/share and each of the
businesses and investments by different valuation metrics separately, adding
Rs36/share to the equity-linked business (benchmarked to industry leaders), we
get our SOTP value of Rs134/share. Upside risks to our PO are buoyant equity
markets as most of its non-infrastructure business is equity-linked or if markets
were to value the bumper earnings (which it may make based on the equity
returns) on a P/E basis. Downside risks are inability to access low cost deposits
and not have the ability to price loans in sync with the loan tenor, which could
result in margin pressure. NPLs could arise given the long gestation of some
power projects. Focus on asset management and fee-based businesses could
make earnings more lumpy.Upside risks are a windfall gain in income from PE
exits that could bump up a years earnings
LIC Housing Finance, Ltd. (LHFLF)
We rate LIC Housing Finance as an Buy with a PO of Rs260, including Rs3.4/shr.
for its 20% stake in LIC Mutual Fund. LIC HFC has managed growth and asset
quality well through the last two years. Moreover, with doing away of the fixed
rate product, it will likely manage spreads better. While the stock has been the
best performer YTD (across financials), over last 1 month it has underperformed
by +5-6% (vs. Sensex) owing to concerns on weak 1Q earnings. However,
factoring in weak 1Q earnings, return ratios still remain healthy (RoAs at 1.8%
and RoEs at +23-24%). Hence, we believe stock trading at 2.0x FY12 book (1.8x
FY13 book), can trade at similar multiples 1-yr out (FY13). Our PO is based on
Gordon model theory of RoE / CoE wherin we see RoE at +24pct and CoE at
14pct, hence, we still assign a 20pct premium to this theoretical model for strong
growth and return ratios. Downside risks are spike in wholesale rates leading to
margin pressure and NPL spiking
Manappuram (XMGPF)
We set our PO at Rs75/shr. for MGFL. MGFL is the second largest NBFC with
market share of +7-8% in organized segment. We believe stock trading at +2.2-
2.3 FY12E book can trade at similar multiples one-year out (FY13E), as 1) we
estimate net profit growth of +55% in FY12 and +35% in FY13, 2) MGFL
capitalizes on US$11bn market opportunity growing at +30-35% yoy, with MGFL
better positioned driven by rapidly rising distribution and proven expertise and, 3)
asset quality remains manageable (net NPLs at <0.3%) driven by strong risk
management systems and sentimental value of collateral. Hence, we estimate
above-average RoAs (+4.0-4.5%) and RoEs (+22-24%) to sustain. Our PO is
based on Gordon theory multiples assuming RoE of 22%, CoE at 14% and
sustainable growth of 8%), as growth potential for MGFL is strong. Our Rs75
price objective implies P/E of 10.4x FY13E EPS, with higher earnings trajectory.
Key risks are rise in thefts and frauds and increase in compeitition, which can hurt
growth. In light of RBIs recent actions, while the cost of capital will go up access
to capital also could be challenging as banks may no longer find it attractive to
lend to gold finance companies. MGFL's inability to scale up in a timely manner
its risk management systems in line with expanding business could potentially
lead to asset quality issues.
Power finance corporation Ltd (PWFEF)
We rate PFC as a Buy with PO of Rs240. But we maintain Buy as we believe
asset quality issues are overdone (working capital loans to SEBs and merchant
power project loans together constitute <+4-5% of loans) and risk-return is
attractive, with stock trading at +1.4-1.5x FY12 book (1.2x FY13 book), with RoAs
sustaining at 2.7% and RoEs at 17% and stock U/p vs. markets (30% YTD)
captures the downside risks. Moreover, PFC is trading at a 10-20% discount to
its peers (REC, IDFC) despite better risk-profile. Growth (volume) is likely to
sustain at +20% especially as PFC remains a direct play on financing of power
projects in India (key govt. focus area). Risks are higher defualts that could lead
to asset quality issues.
Rural Electrification Corporation Ltd (XULEF)
Our PO is Rs240. Our PO reflects an average of 1.6x one-eyear fwd multiple of
RECs trading history. But, risk-return is attractive, with RoEs of +21% in FY12/13,
stock trading at 1.3x FY13BV. Our PO is at a 10pct premium to Gordon multiples,
as structurally power financing remains a growth story over the longer term and
we believe REC remains better positioned to capitalize on the growth. REC
remains a direct play on the India infra story, in our opinion. Risks are higher
exposure to State Electricity Boards (SEBs) in the T&D space that may not be
able to increase tariffs resulting in defaults to REC.
Shriram Transport Finance (SHTFF)
We rate Shriram Transport Finance (STFCL) a Buy, with a PO of Rs850. STFCL
is a leader in pre-owned truck financing (organized), with 20-25% market share,
and it has a 7-8% share in new truck finance. STFCL, owing to its unique
appraisal skills, wide local distribution and 10-year track record, has shown a
75% earnings CAGR over the past 5 years, while restricting net NPLs to 1.0%.
We estimate earnings growth at +20% in FY12/13E, and RoE to be amongst the
highest, at over +26-27%. We, therefore, believe the stock, trading at +2.5-2.6x
FY12E book, can trade up to +2.5-2.6x FY13 book. Our PO is at a +35%
premium to Gordon multiples owing to high returns (highest in the sector) and
market leadership position of the company. Alternatively, one can value STFCL
on PE basis, given that the company has the flexibility of securitizing, which can
allow it to raise capital without dilution. Our PO implies 13x FY12E earnings,
which is lower than the historical P/E range of 14-15x and still a +15% discount to
market multiples. Risks are a rise in defaults, which could erode earnings, and the
entry of banks into the used CV finance segment, which could hurt yields.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Financial Services
RBI: NBFCs / new Bk license-
The good, bad and not so ugly
„Recommendations on NBFC sector; Draft on new Bk license
RBI published a report on working group recommendations on issues and
concerns in the NBFC sector, a group led by Ms. Usha Thorat. Also, RBI has
come out with revised ‘draft guidelines’ on new bank licenses.
Recos. on new license; Who / How many?; Almost all qualify
RBI has come out with revised draft guidelines on new bank licenses. A precondition is that all entities / groups in private sector / controlled by residents must
have a 10-year track record. In contrast, companies having income / assets of
10% or more (last 3 years) from real estate / broking would not qualify. Minimum
capital required is Rs5bn. Foreign holdings may be capped at 49% (vs. 74% now)
for the first 5 years. Further, 25% of branches should be in unbanked centers.
Existing NBFCs, if considered eligible, may be permitted to either promote a new
bank or convert themselves into banks. Almost all groups / NBFCs may qualify!
Recos. for NBFC sector; moving toward parity with banks
The key recos. include a) higher Tier I ratio of 12%, b) revision in the timeline for
classification in NPA to 90 days from current 180/360 days, c) introduction of
mandated proportion of G Sec / Cash with RBI, d) NBFCs to be covered under
SARFESI Act and e) hike in stand=alone NBFCs’ risk-weight to comm. real estate
and capital market exp. The aim of recommendations appears to be bringing
parity in regulating NBFCs and banks, and reducing regulatory arbitrage.
12% Tier 1 for NBFCs; NBFCs well placed; HFCs out of ambit
The committee has also recommended that NBFCs maintain a minimum Tier 1 of
12% (vs. 7.5% now, 10% for IFCs; total at 15% now), but we estimate that most
NBFCs are likely to see their Tier 1 still at +12% (FY14), although leveraging
capabilities for NBFCs are likely to stand reduced. HFCs (HDFC Ltd. and LIC HFC)
are out of this ambit, as they are Housing Fin. cooompanies regulated by the National
Housing Board and their CAR required stands at 12% now (vs. 15% total for others).
NPL recognition norms could hurt Infra. Finco’s / Shriram
Power Fincos (PFC, REC), IDFC, Shriram and Manappuram currently classify
NPLs under 180-day norms. Only Indiabulls Fin. and R-Cap follow 90-day norms.
While Power Fincos / IDFC have low NPLs as of now, PFC / REC could have to
provide for on standard assets (~25bps), which could hurt their earnings in the
medium term. But our FY12/13 earnings already factor this in and, if implemented,
govt.-owned NBFCs (PFC / REC) would provision in a phased manner, which
could cushion earnings impact. IDFC already does provide ad hoc 1% of
disbursements as std. asset prov. Shriram could see NPLs more than doubling (to
+5.3-5.5%) from present and prov. cover come-off (82% now), but they could also
be allowed to do so in a phased manner. Assuming the worst case, if not in a
phased manner, then the impact on FY13 earnings for Shriram could be +3-5%
Price objective basis & risk
HDFC (HGDFF)
We set our PO at Rs800 to factor in 1) overall growth momentum sustaining,
especially in retail and 2) we believe HDFC is likely to deliver RoEs of +23% (prewarrants) on profit growth of 21/20% in FY12/13. Our PO is based on a premium
to the Gordon model theory. Moreover, we believe HDFC being a quality
defensive growth stock, valuations for the stock tend to be more PE led than BV
led. Hence, the stock, trading at 23x FY11 earnings (adj. for subs), can continue
to trade at similar multiples 1-year out, given profit growth of +21/20% in FY12/13.
We think there may be upside to our SOTP (Rs166/shr), especially from HDFC
Bk (expanding distribution and market share) and life insurance. A sharp rise in
NPLs and an inability to maintain growth are risks to our price objective.
IndiaBulls Financial Services (IBLFF)
We set our PO at Rs240. We believe stock trading at 1.1x FY12 adj. book can
trade up to 1.5x FY12 adj. book given 1) earnings growth of +25% over FY12/13,
2) RoEs inching towards 20% levels vs. <17% in FY11, RoAs sustaining at +3.5%
and, 3) asset quality manageable (net <0.5%). Our PO implies target P/E of 8.0x.
PO is maintained despite earnings increase cause we are already pegging the
PO at +10-15% premium to Gordon theory multiples (RoE at 19% and CoE at
14%) factoring in rebound in earnings trajectory and business momentum. Risks
are a very strong business growth leading to a spike in NPLs which could hurt
earnings momentum and a sharp rise in wholesale borrowing costs can lead to
spread compression.
Infrastruct Dev (IFDFF)
We value IDFC on a sum-of-the-parts approach resulting in an aggregate value of
Rs134/share. Valuing its core infrastructure lending business at +1.4-1.5x FY13E
book on a appro. 15% core ROE for a value of Rs98/share and each of the
businesses and investments by different valuation metrics separately, adding
Rs36/share to the equity-linked business (benchmarked to industry leaders), we
get our SOTP value of Rs134/share. Upside risks to our PO are buoyant equity
markets as most of its non-infrastructure business is equity-linked or if markets
were to value the bumper earnings (which it may make based on the equity
returns) on a P/E basis. Downside risks are inability to access low cost deposits
and not have the ability to price loans in sync with the loan tenor, which could
result in margin pressure. NPLs could arise given the long gestation of some
power projects. Focus on asset management and fee-based businesses could
make earnings more lumpy.Upside risks are a windfall gain in income from PE
exits that could bump up a years earnings
LIC Housing Finance, Ltd. (LHFLF)
We rate LIC Housing Finance as an Buy with a PO of Rs260, including Rs3.4/shr.
for its 20% stake in LIC Mutual Fund. LIC HFC has managed growth and asset
quality well through the last two years. Moreover, with doing away of the fixed
rate product, it will likely manage spreads better. While the stock has been the
best performer YTD (across financials), over last 1 month it has underperformed
by +5-6% (vs. Sensex) owing to concerns on weak 1Q earnings. However,
factoring in weak 1Q earnings, return ratios still remain healthy (RoAs at 1.8%
and RoEs at +23-24%). Hence, we believe stock trading at 2.0x FY12 book (1.8x
FY13 book), can trade at similar multiples 1-yr out (FY13). Our PO is based on
Gordon model theory of RoE / CoE wherin we see RoE at +24pct and CoE at
14pct, hence, we still assign a 20pct premium to this theoretical model for strong
growth and return ratios. Downside risks are spike in wholesale rates leading to
margin pressure and NPL spiking
Manappuram (XMGPF)
We set our PO at Rs75/shr. for MGFL. MGFL is the second largest NBFC with
market share of +7-8% in organized segment. We believe stock trading at +2.2-
2.3 FY12E book can trade at similar multiples one-year out (FY13E), as 1) we
estimate net profit growth of +55% in FY12 and +35% in FY13, 2) MGFL
capitalizes on US$11bn market opportunity growing at +30-35% yoy, with MGFL
better positioned driven by rapidly rising distribution and proven expertise and, 3)
asset quality remains manageable (net NPLs at <0.3%) driven by strong risk
management systems and sentimental value of collateral. Hence, we estimate
above-average RoAs (+4.0-4.5%) and RoEs (+22-24%) to sustain. Our PO is
based on Gordon theory multiples assuming RoE of 22%, CoE at 14% and
sustainable growth of 8%), as growth potential for MGFL is strong. Our Rs75
price objective implies P/E of 10.4x FY13E EPS, with higher earnings trajectory.
Key risks are rise in thefts and frauds and increase in compeitition, which can hurt
growth. In light of RBIs recent actions, while the cost of capital will go up access
to capital also could be challenging as banks may no longer find it attractive to
lend to gold finance companies. MGFL's inability to scale up in a timely manner
its risk management systems in line with expanding business could potentially
lead to asset quality issues.
Power finance corporation Ltd (PWFEF)
We rate PFC as a Buy with PO of Rs240. But we maintain Buy as we believe
asset quality issues are overdone (working capital loans to SEBs and merchant
power project loans together constitute <+4-5% of loans) and risk-return is
attractive, with stock trading at +1.4-1.5x FY12 book (1.2x FY13 book), with RoAs
sustaining at 2.7% and RoEs at 17% and stock U/p vs. markets (30% YTD)
captures the downside risks. Moreover, PFC is trading at a 10-20% discount to
its peers (REC, IDFC) despite better risk-profile. Growth (volume) is likely to
sustain at +20% especially as PFC remains a direct play on financing of power
projects in India (key govt. focus area). Risks are higher defualts that could lead
to asset quality issues.
Rural Electrification Corporation Ltd (XULEF)
Our PO is Rs240. Our PO reflects an average of 1.6x one-eyear fwd multiple of
RECs trading history. But, risk-return is attractive, with RoEs of +21% in FY12/13,
stock trading at 1.3x FY13BV. Our PO is at a 10pct premium to Gordon multiples,
as structurally power financing remains a growth story over the longer term and
we believe REC remains better positioned to capitalize on the growth. REC
remains a direct play on the India infra story, in our opinion. Risks are higher
exposure to State Electricity Boards (SEBs) in the T&D space that may not be
able to increase tariffs resulting in defaults to REC.
Shriram Transport Finance (SHTFF)
We rate Shriram Transport Finance (STFCL) a Buy, with a PO of Rs850. STFCL
is a leader in pre-owned truck financing (organized), with 20-25% market share,
and it has a 7-8% share in new truck finance. STFCL, owing to its unique
appraisal skills, wide local distribution and 10-year track record, has shown a
75% earnings CAGR over the past 5 years, while restricting net NPLs to 1.0%.
We estimate earnings growth at +20% in FY12/13E, and RoE to be amongst the
highest, at over +26-27%. We, therefore, believe the stock, trading at +2.5-2.6x
FY12E book, can trade up to +2.5-2.6x FY13 book. Our PO is at a +35%
premium to Gordon multiples owing to high returns (highest in the sector) and
market leadership position of the company. Alternatively, one can value STFCL
on PE basis, given that the company has the flexibility of securitizing, which can
allow it to raise capital without dilution. Our PO implies 13x FY12E earnings,
which is lower than the historical P/E range of 14-15x and still a +15% discount to
market multiples. Risks are a rise in defaults, which could erode earnings, and the
entry of banks into the used CV finance segment, which could hurt yields.
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