Defying macroeconomic headwinds such as economic slowdown, slowing consumer demand and high interest rate environment, some of the large retail-focused non-banking financial companies (NBFCs) like M&M Financial Services, Bajaj Finance, Muthoot Finance and Shriram City Union have delivered robust performance in FY12 and the quarter ended June 30, 2012. The road ahead, however, may not be as smooth for them and the industry.
“Due to the semi-urban and rural orientation in the business profile of the retail NBFCs, they have continued to show a strong growth in their disbursements in 2011-12 and the first quarter of current financial year,” says Suman Chowdhury, director, CRISIL Ratings.
“At an industry level, CRISIL estimates the growth in this period to be at 25-30 per cent. This growth rate is expected to slow down to 15-20 per cent in the next 12 months. The key reasons for the same are a) slowing sales of passenger car, heavy- and medium-commercial vehicle, and tractor segments and b) expectation of cautious approach in lending due to weaker economic environment,” Chowdhury added. He also expects the industry's non-performing assets (NPAs) to inch up in FY13.
Some of these leading NBFCs seem to be confident of beating the industry trend and delivering good growth in FY13, while analysts, too, don't seem to be majorly worried, though they are a little cautious. Due to a strong traction in the consumer finance business, along with new products in the lifestyle financing segment, analysts expect Bajaj Finance to deliver 20-30 per cent growth in income and profits in FY13.
For M&M Financial, its diversified presence and strong earnings visibility stands it in good stead. "While we remain cautious given the weak monsoon, diversification in product and geography mix with pure farm income dependent customers at less than 15 per cent should hold asset quality in good stead," believes Kunal Shah of Edelweiss Securities, who has a buy on M&M Financial's stock with a target price of Rs 802.
On the flip side, Muthoot Finance is expected to be hit by stricter loan to value (LTV) norms in FY13, though analysts expect loan growth should pick up in FY14. "We can expect a 10-15 per cent growth in the AUMs (assets under management) by the third and fourth quarter. If that happens, profit also should increase proportionately by about 10-15 per cent," says George Alexander, Muthoot's managing director. The stock, which largely captures the expected slowdown, is likely to lag in the near term. Though Shriram City Union has delivered strong growth and asset quality trends on a sustained basis, any slowdown in rural economy and a poor monsoon remain key risks. Barring Muthoot, the stocks of other three firms partly captures most of the positives and are hovering closer to their historical highs, indicating any shortfall in performance (versus expectations) could impact valuations.
Anand Shanbhag, executive director and head of research at Avendus securities, says, "An increase in the tilt towards retail loans, amid a slowdown in corporate loans within banks, is likely to raise competition in the commercial vehicle (CV) financing segment. Growth in competition and a fall in growth of new CV sales may drive moderation in loan growth for retail financials. Because of this, and the consequent profitability, the rise in the price/book premium of retail financials to NBFCs may not sustain. We prefer Mahindra Finance, as its earnings growth is likely to remain higher than its peers."
| HEALTHY GROWTH, SO FAR | ||||||||
| Rs crore | M&M Fin. Svcs. | Bajaj Finance | Muthoot Finance | Shriram City Union* | ||||
| Q1'FY13 | FY13E | Q1'FY13 | FY13E | Q1'FY13 | FY13E | Q1'FY13 | FY13E | |
| Net interest income | 487 | 2,142 | 403 | 1,532 | 591 | 2,455 | 370 | 1,400 |
| % change y-o-y | 47.0 | 30.8 | 47.2 | 23.0 | 24.8 | 13.8 | 81.4 | 33.2 |
| Total income | 491 | 2,175 | 439 | 1,762 | 597 | 2480 | 372 | 1,423 |
| % change y-o-y | 41.3 | 29.9 | 42.0 | 23.6 | 24.7 | 13.9 | 71.0 | 32.2 |
| NIM (%) | 9.2 | 10.2 | 12.4 | 9.3 | 9.9 | 9.2 | 11.0 | 10.9 |
| Bps change ** | -94 | 10 | 70 | -132 | 20 | -90 |
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* Shriram reports net operating income and not NII
E: Estimated; Source: Companies, analyst reports
June quarter: Auto, Consumer segments drive growth
While loan growth remained sluggish sequentially (in line with industry trend), the metric continued to be robust on a year-on-year basis. Gold loans, consumer durables financing and two- and three-wheeler financing fuelled strong disbursements for these players. However, commercial vehicle (CV) and construction equipment financing witnessed sluggish growth for another quarter.
M&M Financial's auto/utility vehicles (up 31 per cent--highest growth of this segment since December 2010 quarter) and cars finance businesses both registered over 25 per cent growth, fuelling top line expansion. Its management is keeping a close watch on monsoons and believes year-end recoveries will be hit due to weak monsoons. Analysts expect the company to clock loan growth of 28.5 per cent in FY13. Bajaj Finance gained from strong traction in its consumer durables (high replacement demand for air conditioners) and small and medium enterprises businesses. But, construction equipment business contracted. The Bajaj Finance management expects to clock loan growth of 25-30 per cent this fiscal.
Despite the stricter norms imposed by the Reserve Bank of India in April, curtailing the LTV of gold lenders, both Muthoot Finance and Shriram City Union Finance (gold loans form 40 per cent of its total assets) continued to post robust loan growth of 41 per cent and 23 per cent, respectively. Analysts though remain sceptical on the sustainability of Muthoot's loan growth for this fiscal in the wake of the new LTV norms and are factoring in an increase of just 1.9 per cent.
Margins steady, asset quality sees some pressure
While strong pricing power in the consumer durables segment enabled Bajaj Finance to increase net interest margin (NIM) by 70 basis points sequentially, lower cost of funds led to stable NIMs for Shriram and Muthoot Finance. M&M Financial, though, witnessed a lower-than-anticipated contraction in NIMs, thanks to higher assignments and write back of excess provisions. Falling interest rates will enable both M&M Financial and Shriram to hold on to their NIMs, going forward. Removal of priority sector benefits and higher funding costs is seen impacting Muthoot's NIMs this fiscal, believe analysts.
These NBFCs' asset quality is expected to remain largely stable, though with some upward bias. "The average gross NPAs in the retail NBFC segment is expected to increase to around two per cent by March 2013, from 1.6 per cent as on March 2012," believes Chowdhury.
While Bajaj Finance is expected to largely maintain asset quality at current levels in FY13, a poor monsoon could rub off negatively on the asset quality of Shriram and M&M Financial. M&M Financial had witnessed a higher-than-expected rise in gross NPAs, indicating towards some weakness on this front. Muthoot also witnessed an increase in NPA in June quarter led by lower LTVs and low appreciation in gold prices. Analysts believe its NPAs will move up going forward.
