We believe currency demonetisation could hurt loan growth at NBFCs. Stress in SME book would rise. We have cut our FY17-18E EPS by 2-23%. We believe premium valuation multiples at NBFCs may not sustain given moderating earnings growth outlook and delay in asset quality recovery. We downgrade Bajaj Finance and Capital First to Underperform; Shriram Transport, Mahindra Finance to Hold. Maintain buy on LIC Housing, our preferred pick.
We believe demonetisation could hurt economic activity in the medium term. Discretionary consumption demand could moderate due to wealth impairment. SME and mortgage segment should see higher stress. Bajaj Finance (BAF) and Capital First (CAFL) could turn more cautious in lending to this segment. Macro slowdown could affect credit demand for CV. Rural sector should slowly normalise as cash crunch eases. We have cut FY18E AUM est. across covered NBFCs by 3-8%.
We believe stress in SME, mortgage loans (R2.2 trillion AUM) would rise as: a) many SMEs have gained from tax arbitrage, unaccounted income that would now erode due to demonetisation and GST; and b) lower property prices due to demonetisation could hit LTV on mortgage loans. We believe truck operators utilisation and cash flows could be affected by slowdown in macro activity. This would affect asset quality in the CV segment.
In rural areas, slippages would rise sharply near term, but this should ease slowly.