CV financiers: Favourable valuations, but unpredictable fundamentals

Positive management commentary from M&M Finance and Shriram Transport bodes well; sustenance is key

The management of Mahindra & Mahindra Financial Services (M&M Finance) and Shriram Transport last week communicated about an improvement in collection and also gave an idea of how loans could be restructured with customers. The process, though, is at a nascent stage.

Analysts at Prabhudas Lilladher indicate that collection efficiencies have rebounded to 80 per cent in September, against 65 per cent last month. Consequently, there is a 15 per cent month-on-month improvement in disbursements as well, though 70 per cent of these disbursements are largely towards existing customers. Fresh loans disbursed could help customers meet intermittent working capital needs crucial to restarting their business hit by the lockdown.

Companies are also tightening their underwriting standards and in some cases, where loans are backed by assets, the loan-to-value is also being reconsidered for fresh disbursements and restructuring. While details of restructuring will likely be known from management commentary after the September quarter results, and a full picture by December, the initial inferences indicate a faster-than-anticipated turnaround for vehicle financiers.

Yet, stocks of these lenders — M&M Finance and Shriram Transport — are down 8 – 12 per cent in a month and does not reflect the unlocking of economy and management optimism. Cholamandalam Investment and Finance (Chola Finance), though, is an exception with gains of over 6 per cent, thanks to its diversified loan book, in terms of urban-rural mix and product offering.

Depressed stock movement may be viewed as the Street’s apprehensions around the initial green shoots. Nomura recently stated after a swift recovery of activity, it expects the sequential pace of activity to slow down in the second half of FY21, as new infections remain at elevated levels and as the pandemic is hurting household jobs and firm profitability. “Growth will likely remain negative over the next three quarters,” Nomura's analysts said,  mentioning that much of the normalisation recently seen is largely attributable to increased mobility and weak labour availability. Therefore, full-fledged consumer participation is unlikely. What’s more, companies are refraining from giving any projection on upcoming months which makes the sustainability of demand recovery highly questionable.

Vehicle lenders are often considered the best proxy of the economy as they serve one of the most essential activities. Under these circumstances, even if stocks of vehicle financiers are available at throwaway valuations, investors should be mindful the downside risks may not be entirely captured.