Analysts bet on consumer financiers as festive cheer perks up loan demand

Demand for consumer goods, automobiles, white goods has been holding momentum, which should translate into good credit off take for consumer financiers this festive season, analysts said

With the festival season around the corner, analysts see consumer-financing companies doing extremely well in the next few months. This, they say, will be driven by strong credit growth on the back of massive pent-up demand.

Siddharth Purohit, principal officer and fund manager at InvesQ Investment Advisors, is upbeat on the sector for three key reasons.

“One, this will be the first time in two years that we will see the festival season without any Covid-related restrictions. We expect strong demand. Two, a lot of the balance-sheet clean-up has already happened, and we haven’t seen any serious asset quality threat regardless of the pandemic. Financiers created healthy provisions earlier. Consequently, incremental provisions will be lower, augmenting earnings,” he says.

Three, consumer-financing companies have healthier pricing power. Rising interest rates won’t affect their business much, says Purohit.

Siddharth Khemka, head of retail research at Motilal Oswal Financial Services (MOFSL), too, observes that the demand for consumer goods, automobiles, white goods has been holding momentum. This, he says, should translate into good credit offtake for consumer financiers this festival season.

According to a recent CRISIL report, non-bank lenders’ asset growth is expected to jump to a four-year high of 11-12 per cent in 2022-23 (FY23).

While this will still be lower than pre-pandemic levels, which witnessed 20 per cent growth in the three years up to 2018-19, CRISIL expects unsecured loans, which comprise business loans to small and medium enterprises and consumer loans, to see pre-Covid era growth of 20-22 per cent in FY23.

“With non-banking financial companies (NBFCs) focusing on higher-yield segments, unsecured loans, which have the second-largest share (16-20 per cent) in the NBFC assets under management (AUM) pie, may be the only segment to touch pre-Covid era growth of 20-22 per cent this financial year (FY23). The cautious approach of NBFCs had resulted in a decline in AUM for this segment in 2020-21, while 2021-22 (FY22) saw V-shaped recovery,” says Ajit Velonie, director, CRISIL Ratings.

While business loans will benefit from macroeconomic tailwinds, given the expected growth of 7.3 per cent in gross domestic product in FY23, consumer loans will benefit from rising retail spend across consumer durables, travel, and other personal consumption activities, notes the credit rating agency.

On the bourses, the shares of related companies have largely outperformed the benchmark indices so far this financial year. For instance, shares of Mahindra & Mahindra Financial Services (Mahindra Finance), Shriram City Union Finance (SCUF), Sundaram Finance, and L&T Finance Holdings have surged between 4.7 per cent and 44.6 per cent, reveals ACE Equity data.

On the flip side, Bajaj Finance and IndoStar Capital Finance have given returns of 1.7 per cent and minus 17 per cent, respectively. By comparison, the Nifty50 and the Nifty 500 indices have added 4.6 per cent and 2.36 per cent, respectively. Analysts say investors must watch out for any spike in non-performing assets (NPAs) for another quarter or so.

“Consumer financiers have been doing extremely well as far as credit offtake is concerned. Investors, however, need to watch the level of NPAs in the quarter ahead. In the final analysis, there is pain in the lower segment and NPAs take about a year to reflect in the balance sheet,” warns Ambareesh Baliga, an independent market analyst.

At the end of the April-June quarter (first quarter, or Q1) of FY23, Bajaj Finance’s gross NPA and net NPA stood at 1.25 per cent and 0.51 per cent, respectively, against 1.6 per cent and 0.68 per cent in the January-March quarter (fourth quarter, or Q4) of FY22. For Mahindra Finance, gross Stage 3 loans (loans overdue for over 90 days) increased from 7.7 per cent in March to 8 per cent in June.

SCUF’s gross NPA stood at 6.11 per cent in Q1FY23 versus 6.31 per cent in Q4FY22, while net NPA was 3.32 per cent in Q1FY23 and 3.3 per cent in Q4FY22.

However, Purohit of InvesQ says even during Covid-19, consumer financiers were able to maintain their asset quality well, and consumer behaviour isn’t as bad as was feared. There isn’t any serious concern on the NPA front for now.

As an investment strategy, Khemka of MOFSL suggests accumulating Bajaj Finance and Mahindra Finance on every correction, while Baliga advises investors to wait until valuations become comfortable.