HFCs to remain resilient: We believe housing finance corporations (HFCs) will continue to stand out in the NBFC space, despite weak macro environment, as home demand remains delinked from broader economic activity and this in turn should continue to benefit both HDFC and LICHF. Margins should remain stable, supported by cut in base rate by banks in Q3.
HDFC is likely to report higher profit growth due to stake sale in HDFC Life insurance in Q4.
Some signs of recovery for vehicle financiers: Commercial vehicles (CVs) segment continues to see steady demand pick-up, especially in the medium and heavy segment (MHCV), while LCV is also coming up the curve now.
However, rural economy remains weak and so rural demand for cars and tractors continues to suffer barring for the temporary pick-up related to Q4 seasonality. However, interest reversals due to transition to more stringent NPL recognition rules should impact their margins negatively as well as increase provision levels. For Shriram Transport Finance Co Ltd (SHTF), the impact will likely be higher as it transitions from 180dpd to 150dpd in Q4FY16, while Mahindra and Mahindra Financial Services Ltd (MMFS) should see lower impact as it shifts from 135 days to 120 days nonperforming loan (NPL) recognition.
Resolution under way for power financiers: The power sector has seen some resolution coming through in the fourth quarter on their discom exposures, which is likely to have a mixed impact on both PFC and REC. With the issuance of over Rs 1,000 bn worth of state government bonds as part of the implementation of the UDAY scheme, PFC and REC are likely to see some of their SEB exposure going off their books to banks/other market participants. While this will reduce the credit risk on their books and release capital, their margins will be impacted negatively. We believe FY17 will see a full impact of these developments.
However, credit risks from pvt sector genco exposures remain.
Q4 earnings outlook: Overall, we expect profitability to remain stable. For our covered universe, we expect a PAT growth of 10% y-o-y (after adjusting for one-off capital gains and provision for HDFC); however, vehicle
financiers could show y-o-y decline in earnings.
HDFC remains our preferred play within NBFCs as we believe the underlying business dynamics remain robust and the stock remains defensive in a volatile economic environment. Downside risks: (i) competitive pressures could slow business growth or impact margins; (ii) Asset quality risks.
Banking system housing loan growth
Housing demand remains delinked from broader economic growth due to the underlying demographics such as a higher population in working age, migration from rural to urban centres, urbanisation, shift to nuclear family structure, etc. As a result, we are seeing a steady growth in housing demand in India. Well-entrenched NBFCs such as HDFC and LICHF stand to gain from the continuation of this trend.
CV sales growth
Commercial vehicles growth remains encouraging for the past few quarters. What seemed like a temporary phenomenon is now showing durability. M&HCVs sales remain robust at 30% y-o-y, while LCV growth is slowly gaining momentum. Common drivers as per bankers are replacement demand, pick up in road construction activity, positive impact on income from decline in diesel prices, improvement in freight prices, gain in market share from railways, etc.
Passenger vehicles growth
Our talks with banks and NBFCs suggest that while overall passenger car volumes remain subdued, the urban market is doing better due to a slew of new launches as well as better income buoyancy of urban customers. However, rural market demand remains weak, which is dragging down the overall passenger vehicle sales.
Tractor sales growth
Tractor sales pick up is more of a low base effect than actual improvement in demand. Primary reason has been weakness in rural economy and slowdown in alternate uses of tractors such as transportation of raw material for infrastructure activities.