Worries regarding regulatory changes, slowing credit offtake and asset quality have been factored in.
It hasn’t been an easy quarter for automobile financiers, weighed down by systemic pressures. Apart from the hawkish interest rate environment, policy changes withdrawing priority sector classification for bank lending to these non-banking financial companies (NBFCs) and securitisation norms have impacted the sector. While demand has softened, concerns also surround the portfolio quality and interest spread outlook. However, the sharp correction in their share price makes a few of these attractive.
Key companies include Shriram Transport Finance Company (STFC), in the new and used medium & heavy commercial vehicle space, Mahindra & Mahindra Financial Services (MMFS), where M&M’s automobile, utility vehicle and tractors business is 54 per cent of the total portfolio, and Bajaj Finance (now Finserv Lending), which has a captive two-wheeler and three-wheeler portfolio from Bajaj Auto (about 23 per cent of total loan book).
| M&M SCORES OVER PEERS | |||
| Bajaj Finance | Shriram Transport | M&M Finance | |
| Performance | |||
| NII (Rs cr) | 326 | 835 | 415 |
| % chg q-o-q | 5.2 | 6.7 | 17.2 |
| PAT (Rs cr) | 87 | 299 | 136 |
| % chg q-o-q | -4.0 | -13.8 | 29.2 |
| EPS (Rs ) | 23.9 | 13.2 | 13.2 |
| % chg q-o-q | -3.8 | -13.8 | 32.6 |
| % chg y-o-y | 65.4 | -0.2 | 9.0 |
| Key Parameters | |||
| Loans disbursed (Rs cr) | 3352 | 4794 | 4515 |
| % chg q-o-q | -6.6 | 0.2 | 16.0 |
| NIM (%) | 12.7 | 8.19* | 11.0 |
| BPS chg q-o-q | -120 | 60 | 40 |
| Gross NPA ratio (%) | 1.6 | 2.7 | 4.1 |
| BPS chg q-o-q | -50 | 3 | -60 |
| Net NPA ratio (%) | 0.3 | 0.4 | 1.0 |
| Provisioning ratio (%) | 80.0 | 85.0 | 75.3 |
| BPS chg q-o-q | 200 | 311 | -440 |
| All figures are for quarter ending September Source: Companies | |||
Mixed show
While AUM (assets under management) growth appeared robust, the trend in disbursement tells the story. Loan disbursements decreased 6.6 per cent for Bajaj Finance sequentially (although 58 per cent higher on a year-on-year basis) in the September quarter, while staying flat for STFC. MMFS, however, bucked this trend, showing 16 per cent sequential (33 per cent year-on-year) growth in disbursements, helped by its strong rural presence where demand has been relatively buoyant, according to an IIFL report.
Companies have negotiated the tough borrowing environment well. The Bajaj Finance management attributed its own relatively slower increase in interest costs to a prudent focus on longer tenure borrowings in the past couple of years. Gross spreads improved sequentially for both STFC and MMFS by 11 basis points and 20 basis points to 10.53 per cent and 10.2 per cent, respectively.
Year-to-date, the sector has seen regulatory changes, including removal of the priority sector tag for bank lending (to such NBFCs) and a near-standstill in securitisation after changes to norms. This, with some shift to lower yielding assets in the business mix, has impacted net interest margins (NIMs). NIMs fell sharply on a year-on-year basis for MMFS and Bajaj Finance, though it was higher for STFC. However, stable funding costs helped NIMs improve sequentially for both MMFS and STFC. The margin performance flowed to a relatively robust net interest income growth for MMFS at 17 per cent sequentially (25 per cent year-on-year). Though Bajaj Finance and STFC saw a more modest growth sequentially, it was healthy between 19-34 per cent compared to the year ago period.
Absolute gross non-performing assets (GNPAs) were flat for MMFS, as the company wrote off Rs 77 crore of loans. If retained on the books, these would have increased GNPAs by 11 per cent, say analysts. STFC felt the impact of the Karnataka mining ban and wrote off Rs 60 crore of loans and enhanced loan loss provisioning to 85 per cent, which contributed to a near-doubling of provisioning costs year-on-year to Rs 236 crore (up 66 per cent sequentially). Bajaj Finance saw provision costs 29 per cent higher than the June quarter, although lower than last year. Bottom line performance for Bajaj Finance was boosted by a 10-fold jump in other income (from penal interest and debt recovery, says Brics Research), taking profit after tax to Rs 87 crore (up 65 per cent year-on-year). While MMFS posted a decent show, STFC performance was weak.
Road ahead
While most analysts believe funding costs and, therefore, margins could stabilise, the evident demand slowdown impacting credit growth and asset quality are key concerns.
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MMFS, with its niche positioning in rural areas, could buck the slowing trend, given the buoyancy in the rural economy and structural under-penetration of these markets, according to IIFL Research. However, asset quality is a key concern for the company, given historical issues.
STFC could see asset quality pressure and higher provisioning costs for another two quarters, according to JP Morgan research. Other headwinds for the company are from regulatory concerns, with clarity on securitisation norms pending. This could impact direct assignment transactions, with repercussions on the company’s current business model, the brokerage adds.
Bajaj Finance has an added overhang from the expected equity dilution in the proposed capital-raising. Brics Research believes this quantum (48 per cent of current shareholders’ equity) is significantly higher than required to support projected asset growth. Potential triggers include regulatory clarity on NBFC norms, as well as any easing in interest rates, while the sector’s performance is a derivative of the auto and consumer boom. Valuations reflect the relative outlook for these companies, with MMFS having held up well (outperforming the BSE Sensex by nine per cent in the past month) and trades at a premium at two times FY13 book value estimates.
Bajaj Finance and STFC trade at 1.2-1.6 times the FY13 book, which is attractive, considering that most concerns are priced in at these levels.