FY19-20e EPS for NBFCs cut 2-13%; despite correction, there’s need to be selective; MMFS, BAF are top picks.
Tighter liquidity outlook and higher risk aversion towards NBFC/HFCs debt should lift funding costs & also constrain growth. We cut our FY19-20e EPS across NBFC coverage by 2-13%. We prefer niche NBFCs over HFCs, NBFCS/HFCs with strong parent, favourable ALM profiles. MMFS, BAF are top picks. We upgrade LICHF to Buy & downgrade PNB Housing to Hold.
Tighter liquidity to weigh on growth, margins; stay selective Liquidity conditions remain tight. Rollover risks remain high given elevated risk aversion towards NBFC/HFC debt. Liquidity squeeze near term should ease, but conditions should stay tighter than in recent years, which should impact growth and margins. Post sharp correction, our coverage NBFCs/HFCs ex BAF are trading below historic average While valuations appear to be partly factoring in slower growth, margin pressure, we recommend staying selective.
Prefer niche NBFCs over HFCs
NBFCs have positive ALM gap while most HFCs have ALM mismatch in <1 year bucket. NBFCs in niche segments — rural (MMFS) used CV (SHTF), consumer financing (BAF) are better positioned to pass through higher funding costs. Slow pace of lending rate hikes by banks would constrain HFC lending rates, thus affecting spreads. HFCs could cede market share to banks. With tight liquidity likely to constrain growth at mid-tier HFCs, HFCs with strong parentage could gain share.
BAF—well positioned: With positive ALM gap, strong parentage, AAA rating and diversified liability base, BAF appears well positioned. Its dominance in consumer financing should sustain. Valuations (5.8x FY20e BV, 29x FY20e EPS) are not cheap, but strong earnings growth and returns and asset quality should support premium valuations.
Prefer MMFS over SHTF: MMFS is among our top picks as (a) rural fundamentals are strong; (b) it has positive ALM gap, strong parentage and stronger pricing power in rural segment; (c) asset quality should continue to improve. At 2x FY20e BV, valuations appear attractive. We are positive on SHTF given positive CV outlook, comfortable ALM and stronger pricing power in used CV segment. At 1.4x FY 20E BV, valuations appear attractive.
HFCs: Upgrade LICHF to Buy
With strong parentage, liquid debt, LICHF could gain share from HFCs facing liquidity constraints. At 1.3x FY20e BV, near 2013 trough, we see value emerging given RoE > 16%. We downgrade PNB Housing to Hold given ALM mismatch, higher CP mix, which should affect loan growth and spreads. However, at 1.7x FY20e BV, valuations appear reasonable.