NBFC

02 Jan

On track to achieve 10% loan growth in FY20: VP Nandakumar, Manappuram Finance

Update on the Indian Equity Market:

The stock market started 2020 on a cautious note as Nifty posted muted gains of 14 points to reach 12,182. Among the stocks, the gainers were led by ADANIPORTS (3.1%), POWERGRID (2.7%) and NTPC (2.1%) whereas TITAN (-2.8%), EICHERMOT (-1.9%) and INDUSINDBK (-1.5%) were the laggards. 6 out of 11 sectoral indices were in the red with MEDIA (-0.6%), AUTO (-0.5%) and REALTY (-0.3%) being the top losers while IT (0.5%), FMCG (0.3%) and FIN SERVICES (0.2%) were the gainers.

Excerpts from an interview with Mr VP Nandakumar, MD & CEO, Manappuram Finance published on ETNOW:

·        Manappuram has achieved net profit CAGR of 40% in the last 10 years. Mr Nandakumar talked about the strategy which helped the company to deliver growth. The company was focusing on reducing the contract period in gold loan from one year to three months with an option to the customer to renew that every quarter by paying full interest plus bringing the LTV to the new level.

·        The company is able to collect the interest almost every month now and the auctions have come down drastically. It used to be around 4-5% of the total disbursals in the past which has come down to less than 0.5% now.

·        He said that the emphasis is now on new customer acquisition and maintaining the customer base through the use of digital gold loan platform. This facility allows customers to store their jewellery for free. He can also use the gold to avail and service the loan 24 hours a day. Even after office hours, the company observes transactions worth millions of rupees taking place through online platform. Even on holidays, sometimes it touches ₹ 1,000 mn.

·        The company has given a guidance of 10% growth in the loan book for FY20. He is confident of achieving the target. As for the geographies, the growth has been seen all over India, other than the Southern states. This is because of the lower competition amongst the organised lenders. The Bimaru states (Bihar-Rajasthan-Madhya Pradesh-Uttar Pradesh) are showing better growth, the reason being low competition in the states. The strategy of expanding into places, where there is a high concentration of unorganised lenders is paying off for the company.

·        In the last few months, gold prices have gone up and the average LTV in the books have come down. It is somewhere near 60% now which indicates that many of the customers are not availing the full LTV. Maybe around 5-10% or maybe at the maximum 15% of the customers may go for the highest LTV. Others borrow on the basis of their need. The contract period is only for three months. The average life of the loan is around 70 days only. At 70 days average duration plus the LTV of around 60% and ticket size of around Rs 35,000, The Company is insulated by price fluctuation.

·        About the non-gold segment, the asset quality remains the same without any vitiation like in microfinance and the collection remains around 99%. The strategy is to focus on quality. It also enjoys the highest credit rating from CRISIL– AA minus and because of that, the liquidity comfort for the company remains good. For other businesses like vehicle finance, our GNPA was around 2.9% in the last quarter. That has been maintained at the same level whereas the industry GNPA remains higher.

·        In the home finance segment, NPAs are brought down consistently. This quarter, the company plans to bring it to around 4% and towards the end of this year, the company is trying to further bring it down to around 3%. The asset quality in non-gold segments will be improved at the cost of business, still, these businesses like microfinance may grow at around 30%, vehicle finance also may grow around 30%, as would CV financing.

Consensus Estimate: (Source: market screener website)

·        The closing price of Manappuram Finance was ₹ 177/- as of 01-January-20. It traded at 2.7x/ 2.2x / 1.8x the consensus Book Value estimate for FY20E/ FY21E/ FY22E of ₹ 65.7/ 81.3/ 97.6 respectively.

·        Consensus target price of ₹ 177/- implies a PB multiple of 1.8x on FY22E BV of ₹ 97.6/-.

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06 Dec

Edelweiss: Market confidence needs to return for corporate earnings revival.

Update on the Indian Equity Market:

On Thursday, RBI maintained status quo on repo rates at 5.15% in its 5th bi-monthly monetary policy meeting. The market was expecting another rate cut after a cumulative 135 bps cut so far in 2019.  RBI has lowered its Real GDP growth forecast for FY20E from 6.1% to 5.0%. NIFTY turned negative after the surprise announcement and closed 0.2% lower. Among NIFTY50 stocks, the top performers were ZEE (6.2%), TCS (+2.0%) and ITC (+1.6%) while the worst performers were JSWSTEEL (-3.5%), COALINDIA (-3.4%) and BHARTIAIRTEL (-2.7%). NIFTY MEDIA (+2.9%), NIFTY IT (1.3%) and NIFTY FMCG (+0.3%) were the top gaining sectors while NIFTY METAL (-2.3%), NIFTY PSU BANK (-1.8%) and NIFTY PHARMA (-0.9%) were the top losing sectors.

Edelweiss: Market confidence needs to return for corporate earnings revival.

Excerpts from of an interview of Mr Rashesh Shah- Chairman and CEO- Edelweiss Financial Services published in Mint dated 5th December 2019.

  • Comment on the Emerging Ideas Conference: The event is mainly for High Net Worth Individuals (HNIs). The mood is starting to change from the sense of gloom that prevailed from last 5-6 months. People are now looking for opportunities to invest looking at 2020 and 2021.
  • Comment on Corporate Earnings recovery: The last 4-5 years have had very low corporate earnings growth rate. Looking at the current environment, there is a lot of liquidity, interest rates are fairly low and corporate tax rates are lowest in India’s economic history. Now the confidence just needs to come back and that will have a snowball effect. Edelweiss economists have estimated about 100–125 bps of India’s GDP growth comes from global growth. If global growth picks up, India’s GDP growth and corporate earnings growth can get some revival. 
  • Comment on Edelweiss and NBFC sector: For NBFCs, the worst seems to be over. Repairing earnings and growth is still 4-5 quarters away. A lot of NBFCs have become stronger, raised capital, managed liquidity and re-evaluated their business approach. NBFCs have been working on a model where they will be in partnership with banks rather than having competition with banks. All this will take 4 quarters where there will not be a lot of growth.
  • On non-NBFC front, Edelweiss is seeing fair amount of activity in asset management and wealth management including ARC.
  • On Edelweiss’s asset quality: In last one year, asset quality was under stress for all banks and NBFCs due to system liquidity stress. Stalled projects that are economically viable need to be completed. Availability of last mile funding will help. With lower interest rates, lower corporate tax rate profitability of housing projects will improve. In next 2-3 quarters many projects will be back on stream. In 1HFY20, Edelweiss took credit cost of Rs 4,460 mn compared to Rs 4,600 mn in FY19 as they took a proactive provisioning approach. Credit cost in FY20E will be double that of FY19E.
  • Comment on Bond ETF: Government of India is sponsoring a bond ETF where Edelweiss is the asset manager. The first ETF is going to be a bond portfolio of highly rated government PSUs. The average retail investor will get a yield of 7% – 7.5% and liquidity as it will be listed in the market.

Consensus Estimate (Source: market screener)

  • The closing price of Edelweiss was ₹ 113/- as of 05-December-2019. It traded at 1.3/ 1.2x/ 1.1x the consensus BV for FY 20E/ FY 21E/ FY 22E of ₹ 87/ 94/ 105 respectively.
  • Consensus target price of ₹ 145/- implies a PB multiple of 1.4x on FY22E BV of ₹ 105/-.


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04 Nov

Shriram Transport Finance Co: Rural market to see demand in December

Update on the Indian Equity Market:

On Friday, NIFTY closed 0.2% higher. Among sectoral indices, NIFTY media (+7.6%), NIFTY Metal (+2.3%), NIFTY PSU Banks (+1.4%) closed higher while NIFTY Auto (-0.7%), NIFTY IT (-0.5%) ended on a negative note. The biggest gainers were ZEEL (+18.5%), Bharti Infratel (+6.8%) and IndusInd Bank (+5.0%) whereas Yes Bank (-6.1%), Indian Oil Corporation (-2.8%) and TCS (-2.8%) ended with high losses.

Shriram Transport Finance Co: Rural market to see demand in December  

Excerpts from an interview of Mr Umesh Revankar, MD Shriram Transport Finance Co with CNBC-tv18:  

  • Speaking about ongoing talks on the merger of Shriram Transport Finance Co. (STFC) and Shriram City Union Finance, Mr Revankar said, it is still in the idea stage and yet to be discussed at the board level.
  • The merger will bring synergy in businesses. It will also give an opportunity for cross-selling and upselling some of the product across customer bases.
  • The customer base of Shriram Transport Union and STFC put together is about one crore.
  • Once the company will be in a position to offer multi-products, the cost of funds will also come down.
  • Speaking about employees, he mentioned that they won’t resist as the business is quite decentralized and operational freedom is given at ground level.
  • Speaking about the shift from BS-IV to BS-VI he mentioned, that as the cost of the vehicle will increase, the price of resale will also go up. He adds that the transactions will keep happening and the used vehicle market will also grow.
  • The company has penetrated 30% market so enough space is still left to penetrate.
  • Mr Revankar said, the demand is yet to be very positive but on the rural side the demand would come back as crop sowing got delayed by the extended monsoon. November and December may see a big demand in the rural market.
  • The urban market will take some time to grow. Growth of heavy vehicles depend on infrastructure and real estate so unless real estate and infrastructure activity pick up, it will take time.
  • Government is taking steps to restart infrastructure contracts, engineering, construction contracts it will help to get things to normal by December.

Consensus Estimate (Source: market screener website)

  • The closing price of SRTRANSFIN was ₹ 1,144/- as of 1-November-19. It traded at 1.4x /1.2x /1.0x the consensus Book Value for FY20E / 21E / 22E of ₹ 805/932/1078 respectively.
  • Consensus target price of ₹ 1289/- implies a Price to Book multiple of 1.1x on FY22E Book Value of ₹ 1089/-.
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15 Oct

Sundaram Finance – Grabbing little pockets of opportunities available

Update on the Indian Equity market:

On Monday, NIFTY closed +0.22% higher. Among sectoral indices NIFTY Realty (+1.64%), NIFTY Auto (+1.47%), NIFTY Pharma (+1.19%) closed higher while NIFTY PSU Bank (-0.53%), NIFTY IT (-0.32%) ended on a negative note. The biggest gainers were ONGC (+5.50%), TATA Motors (+5.03%), Bharti Airtel (+2.62%) whereas Infosys (-3.50), Bajaj Finance (-2.65%), Bajaj FinServ (-1.22%) closed with high losses.

Excerpts from an interview with T.T Srinivasaraghavan, managing director, Sundaram Finance with CNBC- tv18

  • Talking about prevailing scenario in NBFC space Mr Srinivasaraghavan says NBFCs is probably the lousiest coinage that you could have for any industry, this is because it is as heterogeneous as anything could be.
  • However, he says, that clubbing everything together and saying NBFC is stressed sector will probably will be overstatement
  • Speaking about on ground situation he says, it is not looking much different and there are no signs on reviewal in short term.
  • There is overcapacity and nothing has happened much on the manufacturing side to soak up this additional capacity. Plus, the uncertainty about BS VI continues.
  • Right now, growth is not a priority from company’s point of view, because in a market which is tanking, it is not appropriate to swim against the tide and growing topline in an aggressive way is certainly not a part of the Sundaram Finance DNA.  
  •  The focus is making asset quality robust and grabbing coming opportunities.
  • Speaking about further quarters he says, higher delinquencies cannot rule that out, because in many states, there have been local issues where governments have either held back on payments to contractors or governments have rescinded contracts.
  • So, these local issues will certainly affect the cash flows.
  • Speaking about government purchases or the State Transport Undertaking (STU) purchases, he says, it is not really going to feed into business for banks and NBFCs but it will be a benefit for original equipment manufacturers’ (OEMs).
  • Mr Srinivasaraghavan says, now that interest rates have come down, corporate tax Is reduced. Corporates should come up and take some responsibility and do something that will help in near future instead of cribbing.
  • Mr srinivasaraghavan says the overcapacity is cyclical but this the longest one. He says, we should not worry about it in long term.
  • Scrappage is a welcome thing but it wont act as a magical wand. It has to accompanied by several other things.
  • He says, monsoon have been a great positive news in a gloomy horizon. At least we can hear about people enquiring, people may be looking at perhaps some buying, so post Diwali perhaps there could be some buying taking place.
  • He adds, that this time we will have a ‘pa’ shaped recovery, which is a Tamil alphabet. It is a flat line at the bottom, it is neither a U nor a V. It is two vertical lines on the side and a horizontal line connects both of them.

Consensus Estimate (Source: market screener website)

  • The closing price of Sundaram Finance was ₹ 1,610/- as of 14-October-19. It traded at 24.5x/ 21.5x/ 21.0x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 65.6/ 74.7/ 76.5 respectively.
  • It trades as P/B 3.1x/2.8x/2.6x the consensus Book value per share for FY20E/FY 21E/FY22 of 507/568/607.
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10 Oct

M&M Finance- 2HFY20 to be better

Update on the Indian Equity Market:

On Wednesday, NIFTY closed 1.7% higher. Among the sectoral indices NIFTY Bank (+3.7%), NIFTY PVT bank (+3.5%), NIFTY PSU bank (+3.1%) closed higher while NIFTY Media (-0.3%), NIFTY FMCG (-0.2%) NIFTY IT (-0.8%) ended on a negative note. The biggest gainers were IndusInd Bank (+5.5%), Infratel (+5.3%), Bharti Airtel (+5.2%) whereas Yes bank (-5.2%), Hero motocorp (-2.8%), Zee (-2.4%) ended on a negative note.

Excerpts from an interview with Mr. Ramesh Iyer – Chairman & Managing Director, M&M Financial Services.

  • Mr Ramesh said, “We have been focusing on the semi-urban rural market and we do see that the festival demand, at least the footfall at the dealerships are much much higher than what it was in the last six months.”
  • According to him, the festival season would turn out to be good and normally the second half for the rural market is always good, given the festival, and harvest has been in widespread range. Put together, he expects demand to pick up and the second half to be good.
  • They have revised FY20 loan growth numbers and there are four reasons for that:
    • Their deeper penetration is an advantage as they get volumes from the deeper pockets. 
    • Multi-product approach that they have been taking. Their growth is not dependent on a single product. 
    • They have been little more aggressive in pre-owned vehicle like pre-owned cars, tractors, UVs, etc, and they do see demand for a pre-owned vehicle in the rural market picking up.
    • Large customer base.
  • They have not seen too much competition and they expect some market share growth. So, that is one growth possibility.
  • Pre-owned vehicle segment has been a little aggressive and they do see growth coming from there. While the heavy commercial vehicle segment is not growing, they have a very small base or a low base and they do expect some volume growth there, given the total volume.
  • As far as the pre-owned vehicle is concerned, they were concentrating on cars and UVs. Now, they have also gone into pre-owned tractor financing and that is another very exciting segment.
  • These are the growth drivers and market share gain from their prime products like UV or car segment altogether is helping them maintain growth.
  • They do not see an issue to really worry about from the asset quality front but it all depends on yields. What is going to be the price that will get announced because the farm cash flow is important from a rural perspective, but they believe that given the widespread monsoon, at least in some of the states, the yields would be good.
  • They do not, therefore, see a spike in NPAs but there are some pockets where one could witness delay.
  • Their focus area is going to be semi urban, rural market and that is what they have done for the last 25 years. They do see a pick up in sentiment and they expect that in the next six months, with the festival and the harvest coming up, they should see some buoyancy in that market.
  • They are borrowing from banks, own debentures, fixed deposits and that has helped them maintain growth. But yes, there has been some increase in cost that they have witnessed initially but now that is climbing down.
  • Liquidity has not been an issue and as cost seems to get addressed, they feel a little more comfortable than that of six months back.
  • They will be open to any inorganic growth opportunity, but they do not have anything on the tables at this stage. But clearly, it has to have a strategic fit, a cultural fit and that is what they will look for.

Consensus Estimate (Source: market screener website & Investinng.com website)

  • The closing price of M&M Finance was ₹ 334 /- as of 09-10-19. It traded at 1.7x /1.5x/1.4x x the consensus book value for FY20E/ FY21E/FY22E of ₹ 194 /₹ 218/ ₹242 respectively.
  • Consensus target price of ₹ 378/- implies a P/B multiple of 1.6 x on the FY22 book value of ₹242 /-
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09 Oct

Edelweiss: Liquidity to improve after a few months

Update on the Indian Equity Market:

On Monday, NIFTY closed lower by 0.4%. NIFTY Media (+1.3%), NIFTY Pvt Bank (+0.2%) and NIFTY Bank (+0.1%) were the sectoral indices that closed positive. Among the decliners, the worst performers were NIFTY Pharma (-3.4%), NIFTY Metal (-1.2%) and NIFTY Realty (-1.2%).

Edelweiss: Liquidity to improve after a few months

Excerpts from an interview with Mr. Rashesh Shah- Chairman & CEO, Edelweiss Group published in Economic Times dated 4th October 2019.

  • Though Edelweiss has NBFC business, it is a diversified group. The business includes asset management, wealth management, Asset Reconstruction Company and a lot of other businesses. Edelweiss has always focussed on being a diversified group.
  • The overall book of Edelweiss is not expected to grow but the wholesale/retail mix will go more in favor of retail. Whatever repayments are coming in wholesale, are being used to grow retail.
  • The availability of liquidity has been fairly okay. The partial credit guarantee scheme that was announced in the budget will get operationalized soon and the expectation is about Rs 350-400 bn of the asset portfolios of NBFCs will be bought by banks. This will give a lot of additional liquidity to NBFCs. The credit cycle should start coming back because of this improved liquidity.
  • The stress in the corporate book, wholesale book, and the cash flow has been there for one year. The only good news is that there is no unknown anymore. Everybody knows what sort of cash flows can be expected and everybody is aligned with that.
  • In another three to six months, a lot of things should be back to normal for liquidity in the economy as a whole.
  • Overall, while credit was frozen around April- June, the banking system, especially the PSU banks have opened up the credit flow into the economy. The optimism is more now compared to three months ago.  On the whole, the banking system is on a much better footing to ensure that the economy does not freeze up and make sure that the free flow of credit continues.
  • In the next three to six months things should at least get normalized and then improvement should start. At least, things have stopped getting worse in the last four-five weeks.
  • In terms of real estate, in India, it has been observed that if the project gets completed, then usually recoveries and sales are not a problem. The current effort is to make sure the projects get completed. Also, the demand-supply equation in housing has started to correct. Due to slower launches, the supply of inventory will slowly reduce and as the demand comes back with interest rates coming down and banks pushing home loans, the demand-supply equation will correct.
  • Edelweiss has a 20% portion of its balance sheet exposed to real estate. The P&L is further diversified by earnings from other businesses. The real estate book is also spread over 160 projects and is fairly granular. Out of the 160 projects, all along for the last 8-10 years, about 10 to 20% of the portfolio is always under watch because some intervention is required to make sure the project execution happens, and those parameters have not worsened.
  • Edelweiss has a lot of experience with ARC where they acquire NPAs from banks. Last year Edelweiss resolved quite a few of them with Rs 70 bn worth of recoveries in the ARC business. This year, the aim is for a Rs 120 bn recoveries in the ARC business.

Consensus Estimate (Source: market screener website) 

  • The closing price of Edelweiss was ₹ 78 /- as of 07-October-19. It traded at 8.6x /6.8x/ 5.1x. The consensus EPS for FY20E/ FY21E/ FY22E of ₹ 9.1/11.4/15.3 respectively.
  • Consensus target price of ₹ 169/- implies a PE multiple of 11.0x on FY22 EPS of ₹15.3/-

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