NBFC

Increasing number of borrowers are moving out of moratorium- L&T Finance Holdings

Update on the Indian Equity Market:

 

On Monday, Nifty closed 1.1% higherat 11,022. Within NIFTY50,BRITANNIA (+5.1%), WIPRO (+4.4%), and INFY (+4.4%) were the top gainers, while SUNPHARMA(-3.9%), CIPLA (-2.2%) andZEEL (-1.7%) were the top losers. Among the sectoral indices, IT (+2.6%), FIN SERVICE (+1.6%), and BANK(+1.6%) gained the most.  PHARMA (-1.6%) was the only sector to close in red.

 

Increasing number of borrowers are moving out of moratorium- L&T Finance Holdings

 

Excerpts of an interview with Mr. Dinanath Dubhashi, MD&CEO, L&T Finance Holdings Ltd (L&TFH)published on Economic Times website dated17thJuly2020:

  • In 1QFY21, entire Rs 2,250 mn of exceptional gains have been put towards one-time provisions for COVID-19 impact.
  • In 1QFY21, the three months- April, May and June have been 3 very distinct months. Moving from lockdown to unlock, there was an uptick from April to May to June. The uptick has been very good in rural areas and noticeable everywhere else also. That is reason for being optimistic.
  • In terms of sectors showing revival, tractor is one industry where there is actually positive growth in the month of June 2020 versus June 2019. All disbursements to tractors have grown by 19% YoY in June 2020. The quarterly numbers are negative because April was zero but June has shown the first uptick.
  • There is no concrete answer on how NPAs will be but there are a few noticeable trends in terms of moratorium. For micro loans, loans under moratorium in June have reduced to 48% from 100% in April and May 100%. In the same period, for 2-wheelers, loans under moratorium in June have gone down to 33% from 58-60%. In April, the overall portfolio under moratorium was 75%, it has reduced to 18% in June 2020. Substantial number of accounts under moratorium in June have already paid off in July. So an increasing number of people are paying.
  • L&TFH is holding Rs 90 bn of excess liquidity vs normal levels of around Rs 35-40 bn. As a result of this excess cash, there was a negative carry of Rs 840 mn in 1QFY21. This resulted in NIMs being lower in 1QFY21.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of L&TFHwas ₹ 62.8/- as of 20-July-2020. It traded at 0.8x / 0.7x the consensus BVPS estimate of ₹ 77.3/ 89.0 for FY21E/ FY22E respectively.
  • Consensus target price of ₹ 72.3/- implies a PE multiple of 0.8x on FY22E BVPS of ₹ 89.0/-.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Need to raise money for lending activities – Shriram Transport Finance

Update on the Indian Equity Market:

Markets witnessed a volatile day as Nifty touched intra-day low of 9,728 before closing the day 1.1% higher at 9,914. The top gainers for Nifty 50 were HDFCBANK (+4.4%), HDFC (+3.9%) and ICICIBANK (+3.4%) while the losing stocks for the day TATAMOTORS (-5.9%), INFRATEL (-2.9%) and INDUSINDBANK (-2.8%). The gaining sectors for the day were FIN SERVICES (+2.8%), BANK (+1.9%) and PVT BANK (+1.9%) whereas PSU BANK (-0.9%), REALTY (-0.8%) and PHARMA (-0.6%) were the losing sectors for the day.

Edited excerpts of an interview with Mr. Umesh Revankar, MD & CEO, Shriram Transport Finance; dated 11th  June 2020 from Economic Times:

  • Since the lockdown has been relaxed, the Company is getting a better understanding of the ground reality. The calculation is that the Company’s customers who have taken moratorium are likely to keep paying but with a delay. Looking at the past behavior, customers may ask for some kind of discount or rebate. The Company has taken care of these things during the March quarter results.
  • The Company has given moratorium to all eligible customers. Approximately 24% of the customers have made part payment in April. Another 52% of the customers have made part payment in May. Whatever customers pay will be treated as prepayment into their account. 
  • The Company keeps three months of liability in the balance sheet. This kind of buffer is present at all times. They continue to keep sufficient buffers to manage future liability as well. Whatever collection is coming is used to build that buffer further as lending is not done in an active manner.
  • They are focusing on lending to customers for working capital requirements. The RTO offices are now open and hence the Company expects lending activity to pick up from next month. 
  • The Company has raised some money through TLTRO and some through term loan- both from public sector banks in May and June. The management has not yet discussed any equity raising plans.
  • Credit cost of the Company has gone up from 2% to 2.42% during the March quarter. They are confident of maintaining the credit cost at around 3% by September and maybe till
    December.

Consensus Estimate: (Source: market screener, Investing websites)

  • The closing price of Shriram Transport Finance Ltd was ₹ 652/- as of 16-June-2020. It traded at 0.8x/ 0.7x the consensus BV estimate of 859/ 963 for FY21E/ FY22E/ respectively.
  • The consensus target price of 935/- implies a PB multiple of 0.9x on FY22E BV of 963/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Need more clarity on the extension of the moratorium: Sanjiv Bajaj, Bajaj Finserv

Update on Indian equity market:

Ahead of the monthly F&O expiry session, the Nifty rallied 3.2% (286 points) largely on the back of banking stocks to close at 9,312.  Within the index, only eight stocks closed lower with SUNPHARMA (-2.0%), ULTRACEMCO (-1.5%) and ZEEL (-1.0%) being the biggest losers. Among the winners, AXISBANK (14.2%), ICICIBANK (8.9%) and WIPRO (7.1%) were the highest gainers. Within the sector indices, PVT BANK (7.5%),  BANK (7.3%) and FIN SERVICES (5.9%) were the highest gainers whereas PHARMA (-0.2%) and MEDIA (-0.1%) were the only sectors that closed in the red.

Excerpts from an interview with Mr Sanjiv Bajaj, MD & CEO, Bajaj Finserv aired on  ET NOW on 27th May 2020:

 

  • This pandemic has put the entire economy in a coma because both the demand as well as the supply side has stopped working. He further mentioned that the country needs to get out of lockdown as soon as possible. 
  • Reserve Bank of India (RBI) has taken significant steps and has been quite proactive in the last few months. There is a need to stimulate the demand side as well to balance the equation. People need to be given the confidence to start spending and buy things sensibly. This is how the economy will get back to its feet.
  • According to him, the extension of moratorium was not necessary. For the first three months, the moratorium was understandable as the economy was frozen. The second three-month moratorium needs to be better calibrated. There are still clarifications that a number of companies including Bajaj Finance (a subsidiary of Bajaj Finserv) are pursuing. He would prefer allowing a one-time restructuring which gives the option to the lender to decide which truly deserve extension rather than a blanket moratorium.

 

  • He sought two more clarifications from the RBI. Is the second three-month moratorium applicable only to pre-Covid loans or is it available to new loans today? If somebody takes a new loan today, does he not have to pay for three months? He said that if the above two conditions are allowed, this creates a disadvantage for the lenders.
  • Speaking about the borrowing profile, he mentioned that the sources of borrowing for Bajaj Finance have been well-distributed. The Company does not have over-dependence on Banks. Second, the Company sources 20% of borrowings from fixed deposits. Third, the company keeps 4-7% of borrowings into liquid assets where returns are 4-5% instead of a 20% RoE. This is to ensure that the book stays solid. 
  • He further mentioned that Bajaj Finance at a consolidated level has liquidity of Rs 210,000 mn. It probably takes away Rs 3,000-4,000 mn of profits every year but it creates a stronger franchise in many ways mimicking what a bank does. 

Consensus Estimate: (Source: market screener, investing websites)

  • The closing price of Bajaj Finserv was Rs 4,249/- as of 27-May-2020. It traded at 1.9x/ 1.7x the consensus Book Value estimate of Rs 2,157/ 2,495 for FY21E/ FY22E respectively.
  • The consensus target price of Rs 6,054/- implies a PB multiple of 2.4x on the FY22E BV estimate of Rs 2,495/- 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Over A Third of NBFC Loan book under Moratorium – Edelweiss

Update on the Indian Equity Market:

On Friday, NIFTY closed in the red at 9,039 (-0.74%). Top gainers in NIFTY50 were ZEEL (+7.1%),
M&M (+4.4) and CIPLA (+3.3%). The top losers were AXISBANK (-5.2%), HDFC (-5.1%) and
BAJAJFINSERV (-4.6%). Top sectoral gainers were IT (+1.4%), Media (+1.2%) and Pharma (+0.8%) and
sectoral losers were Fin service (-3.1%), PVT bank (-2.8%) and Bank (-2.6%).

Excerpts of an interview with Rashesh Shah, CEO, Edelweiss group with Bloomberg dated 20th May 2020:

  • Mr Shah said, “For us and for most NBFCs, about 35-38 per cent of the customers have availed of the moratorium. For the last 18 months, NBFCs have been squeezed for liquidity. Ironically, when we entered January 2020, I felt that liquidity had now been managed. And then Covid-19 happened.”
  • NBFCs have been coping with a liquidity crisis ever since the collapse of the IL&FS Group in 2018.
  • With the Covid-19 pandemic amplifying the economic slowdown, NBFCs are expected to face liquidity and solvency strains again. Moody’s Investors Services expects the moratorium to eventually weaken asset quality and add to liquidity stress.
  • April has been extremely challenging for NBFCs from a liquidity perspective. That was particularly because, for NBFCs, the moratorium was a one-way ride. While they had to offer moratoriums to their own customers, they themselves did not receive similar relief on repayments from banks—sparking concerns of asset-liability and cash-flow mismatches.
  • Non-bank lenders are continuing to repay their loans as scheduled. Most NBFCs have decided not to ask for a moratorium from banks and instead ask for fresh loans, as fresh funding can come on new terms and with a lot of specificity as to what you need.
  • Mr Shah expects the company to pay back Rs 4,000 crore to banks as part of its normal repayment schedule. Their ask is they get these funds back as long-term repo operation bonds, a loan or some other form so that they can maintain their liquidity reserves.
  • Mr Shah said Edelweiss, at any point, maintains at least Rs 6,000-8,000 crore of liquidity reserves. Over the last 18 months, the company has kept between 14-20% of its borrowings as liquidity reserves. That would be around 1.5-2.5 times their three-month repayments, Shah said. “We have been aiming for at least 2 times the three-month repayment as liquidity reserve and banks have seen that most NBFCs have reserves that will last at least till the end of July.”
  • Despite the government’s initiatives for the NBFC sector, Mr Shah believes that non-bank lenders have been treated somewhat unfairly. Increasingly NBFCs have been curtailed in what they can do and cannot do.
  • “The problem NBFCs are grappling with is asset-liability mismatch, when suddenly the commercial paper market and debt market closed down then the bank moratorium issue has come about, all this creates a lot of asset-liability mismatch risk.”, he added.
  • Someone in the system needs to take the ALM risk,” he said. “Banks can take it because they have the RBI backstop. But in the last 18 months, we said NBFCs cannot take it, now we say mutual funds cannot take it, then who will take that risk?”
  • Edelweiss also expects some amount of increase in stress and credit costs. However, since the company does not have a significant retail portfolio, it expects the risks to be limited. Credit cost was at 2% and then they had upped it to 4-4.5% of the book. It will now go to 5%.
  • For the industry though, retail loans will see some stress in the near-to-medium term. Long term, collateralized loans will not see much of an impact. Short term unsecured loans will see a lot of impacts.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of EDELWEISS was ₹ 42/- as of 22-May-2020.  It trades at 0.5x/ 0.4x its book value of ₹ 90.2 /100.0 for FY21E/22E respectively.
  • The consensus price target of EDELWEISS is ₹ 99/- which trades at 1.0x the book value of ₹ 100/-

 

Even in current crisis, insurance penetration has not gone up as per expectations – Mr Tapan Singhel, MD&CEO – Bajaj Allianz General Insurance

Update on the Indian Equity Market:

 

On Monday, Nifty closed marginally negative (-0.13%) at 9,239. Within NIFTY50, HEROMOTOCO (+6.1%), TATAMOTORS (+5.9%), and INFRATEL (+5.9%) were the top gainers, while ICICIBANK (-4.6%), BPCL (-3.2%) and DRREDDY (-3.0%) were the top losers. Among the sectoral indices,AUTO (+4.3%), MEDIA (+2.7%) and IT (+1.4%) gained the most. PVT BANK (-2.2%), BANK (-2.1%) and FIN SERVICE (-1.8%) were the top losers.

 

Even in current crisis, insurance penetration has not gone up as per expectations – Mr Tapan Singhel, MD&CEO – Bajaj Allianz General Insurance

 

Excerpts of an interview with Mr.Tapan Singhel, MD&CEO- Bajaj Allianz General Insurance (Part of Bajaj Finserv) published in Business Standard dated 11th May 2020:

  • The staff of Bajaj Allianz General Insurance (BAGIC) was prepared when the lockdown started as they had gone into Work from home (WFH) before the lockdown was announced.
  • During the lockdown, BAGIC has issued around 1.7 mn policies and settled around 900,000 claims.
  • BAGIC has seen that people are more productive in the WFH structure. If that continues, WFH may become the new norm.
  • BAGIC’s growth for FY19 has been 16% vs. industry growth of 9%.
  • Many enquiries are coming up in the retail health segment. Health policies have Covid-19 cover even now. But the spike in health product sales has not been as much as could be expected. This is surprising given the already low penetration levels of health insurance in India.
  • Among other insurance segments, property business has seen positive movement. Motor business is down 40-50% as new car sales have paused.
  • Due to the current crisis, 2 business segments should ideally see a spike that hasn’t happened yet. For the current prices of health insurance products, people should queue to buy cover. But that exponential growth hasn’t panned out as it should in the current scenario. Secondly, cyber insurance cover should also spike given that cyber crimes have moved up 1000%. Even then, there is hardly any sale of individual cyber cover with an annual premium of Rs 700 for a cover of Rs 1 lakh.
  • In the lockdown period, claims on existing health policies have reduced as most hospitals are operating at 30-50% occupancy. Covid-19 claims haven’t moved up significantly either.
  • Mr.  Singhel is of the opinion that there should be a regulator for hospitals to ensure standardization of rates. Insurance companies do their part by negotiating with hospitals to get standardized rates. In the end, the customer has to pay. If claims ratios go up, insurance companies will increase the prices of products. Customers will be burdened by that.

Consensus Estimate: (Source: market screener website)

  • The closing price of BAJAJFINSV was ₹ 4,565/- as of 11thMay 2020. It traded at 2.1x/ 1.8x the consensus BVPS estimate of ₹ 2,173/ 2,583 for FY21E/ FY22E respectively.
  • Consensus target price of ₹ 8,305/- implies a PB multiple of 3.2x on FY22E BVPS of ₹ 2,583.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

 

Banks not giving moratorium should not lead to Asset Liability Management (ALM) mismatch: Mr Ramesh Iyer, Mahindra Finance

Update on the Indian Equity Market:

On Tuesday, Indian indices ended on positive note for the second consecutive day. NIFTY ended up 98 pts (+1.1%) at 9380 level.
Among the sectoral indices, PVTBANK (3.6%), BANK (2.9%) and FIN SERVICE (3.4%) were among the top gainers while PHARMA (-2.3%), FMCG (-0.9%) and METAL (-0.3%) were the losers. INDUSINDBK (17.1%), BAJFINANCE (+9.3%) and HDFC (+8.3%) were the top gainers. SUNPHARMA (-3.0%), IOC (-2.3%) and NTPC (-2.1%) were the top losers.

Banks not giving moratorium should not lead to Asset Liability Management (ALM) mismatch: Mr Ramesh Iyer, Mahindra Finance
Over 75% retail borrowers have opted for loan moratorium
Edited excerpts of an interview with Mr Ramesh Iyer, Vice Chairman (VC) and Managing Director of Mahindra Finance dated 27th April 2020:

• When asked about the collection efficiency after Non-Banking Finance Companies’ (NBFC) operations being partially resumed, he replied that April was not expected to be good for collections because the moratorium was just announced and he is sure that most of the NBFCs would have made some collections.
• Mahindra Finance had about 15-20% collection efficiency but that largely came from the farming community. He is of the opinion that April and May both where the moratorium has been given, no one will want to come and pay.

• He informed that more than 75% of the customers have opted for the moratorium. Initially it was only about 60-65%. Then subsequently they would have reviewed their own situation and would have felt opting for moratorium. He believes that the 25% who are not asking for it, there would be about 4-5% or maybe little more who are fearing the interest that is going to be charged for the moratorium period and therefore they would have made the payment. They might not have the money to pay but fearing the interest, they would have made the payment. But they would come back and possibly negotiate on the interest and take the moratorium.
• When asked about the Asset Liability Management (ALM) mismatch due to the moratorium, Mr Iyer stated that it will depend from NBFC to NBFC. Mahindra Finance in particular always had a good match of ALM. So, banks not giving moratorium should not lead to ALM mismatch because he expects that the disbursements to not be there. Therefore, if the collections are not there to that extent that disbursements are not there, it should kind of offset each other to an extent. But again, it depends on each NBFC independently but the large ones should not have a mismatch.
• He further clarified that some of the banks are giving moratorium on the term loan. The Banks have not announced that but most of the private banks are giving moratorium on the term loans to NBFCs also.
• When asked his opinion on the Franklin Templeton issue is going to further tighten the liquidity in the system, he said that clarifications have been given. Even Templeton has put out some notes. So, this is a one-off case but definitely, whenever something like this happens, it does build up pressure in the system. But in any case, mutual funds were not actively providing funds to NBFCs in the recent past given their own redemption and inflow being a little low. Really what we are looking for is liquidity from the banking system and with so much action already taken by the RBI to provide liquidity in the system, he personally believes if the banks do open up to NBFCs and start providing them funds, then liquidity by itself should not be a problem.
• When asked about his outlook on rural economy and impact on rural cash flows, he said that it is not the farmers who are hugely impacted because it is not across the country that everyone is impacted. After analysis it is found about 65-70% of the districts do remain free from this problem but, the fact is because of the lockdown, the activities are low. But what is important and interesting is that the harvest has been good; wheat output is good, sugarcane is good, potato, onion is good, pulses are good and the government will buy and they will warehouse these products. So surely the farm cash flows should improve and the collections seen in April are coming from the farming community. So, he is not of the opinion that the farmers are impacted.
• He also informed that there is a demand for tractors. The dealerships in some of the locations have opened up. But because of the lockdown there has been a slowdown in the activities. If two months of activity is lost, there would be pressure in the collections and the consumers even if they have the money would like to hold it back and wait and what next happens. So, to that extent, the overdues will go and with three months moratorium provided by the Reserve Bank, if things were to regularise if not from immediate June but even in August, things should settle down well and we should not see increase in NPAs.
• But yes, if this was to get extended and not stop at May and was to continue to go longer then, one will need to relook at the situation and what happens next. But he believes that post August, things would start to look better and definitely rural is not as badly impacted as urban is.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of Mahindra Finance was ₹ 155/- as of 27-April-20. It traded at 0.76x/ 0.70x the consensus BVPS estimate of ₹ 189/205 for FY20E/ FY21E respectively.
• Consensus target price of ₹ 305/- implies a PBV multiple of 1.5x on FY21E BVPS of ₹ 205/-

Continued government and RBI intervention till cure or vaccine available: Sanjiv Bajaj, Bajaj Finserv

Update on the Indian Equity Market:

The market ended higher for the second day on expectations of a fresh stimulus package from the government to reduce the damage caused by the ongoing pandemic. IT (4.4%), Private Bank (+3.2%), and Banks (+2.9%) were the top gainers while the losers were FMCG (-1.4%) and PSU Bank (-0.4%). The gainers were led by Kotak Bank (+8.3%), TCS (+5.5%), and Infy (5.2%) while the top losers were Titan (-3.7%), Hindustan Unilever (-2.7%), and Power Grid (-2.5%).

Continued government and RBI intervention till cure or vaccine available: Sanjiv Bajaj, Bajaj Finserv

Excerpts of an interview with Sanjiv Bajaj, Chairman and Managing Director, Bajaj Finserv published in Business Standard on 22nd April 2020:

  • The timely lockdown to control the spread of the covid-19 pandemic helped prepare medical capacity. To kick-start investments, the gradual opening of economic activities in the non-hotspots needs to be done.
  • The lockdown situation has resulted in both, the demand and supply being stopped, which we have never experienced. It is vital for the government and RBI to instill confidence, especially with small businesses, migrant workers, and individual consumers.
  • The measures announced to provide food and some money to the poor section of the society are commendable. Now, working capital and term loans to restart enterprises are needed to kick-start the economy.
  • Banks, though flush with liquidity are playing too safe by not lending funds to NBFCs, HFCs, and micro-finance institutions to avoid credit risk. It could help if the government covered initial losses.
  • With a large domestic consumption base, our economy can restart faster than many other countries, provided the necessary help is provided. We will need to balance opening up the economy with the spread of the virus and any new information about its fatality. Hence, the government and RBI support will be required until a cure or vaccine is available.
  • The measures announced by RBI are welcome though Mr. Bajaj would like to see a direct liquidity line extended by the RBI for larger NBFCs with assets over ₹ 10,000 crores.
  • Public sector banks are not yet extending back-to-back moratorium to smaller NBFCs that are offering moratorium to their customers. Such anomalies, which will prevent the economy from recovering fast must be quickly removed.
  • Smaller NBFCs must shore up their capital requirement, keep additional liquidity, and maintain conservatism in lending practices, to survive the lockdown.
  • The finance and insurance companies of the group have adapted quickly and reasonably efficiently to the work-from-home regime. Productivity is understandably lower, which impacts response times.
  • A reasonable amount of new insurance business is done, completely digitally. A number of processes will be reoriented to work from home even after the lockdown ends.
  • Bajaj Finserv will be ready to offer the different kinds of loans customers might need, once the economy restarts. The loans and insurance products take care of a large number of essential requirements- loans to buy groceries, for medical procedures, to insuring car, factory, shop, and life.
  • Due to the global economy being under stress, there could be some short-term reallocation of global capital towards developed markets. India, which has a large domestic consumption base and a young population, will end up growing faster and eventually attract global capital.
  • In the past few years, our domestic capital has moved from being invest in non-productive assets to financial assets, which is expected to continue and provide an important and dependable source of money.
  • India can emerge as a strong alternative to China and it is important to leverage this once-in-a-lifetime opportunity.

Consensus Estimate: (Source: market screener website)

  • The closing price of Bajaj Finserv was ₹ 4,717/- as of 23-April-2020. It traded at 2.2x/ 2.2x/ 1.8x the consensus book value estimate of ₹ 2,111/ 2,173 / 2,583 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price is ₹ 8,304/- which implies a PB multiple of 3.2x on FY22E BV of ₹ 2,583/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

COVID-19 impact: Have requested RBI that moratorium sought by consumers should be given, says M&M Fin Services

Update on the Indian Equity Market:

On Thursday, NIFTY continued gains for the 3rd day and ended at 8,641 (+3.9%). Among the sectoral indices, Pvt Bank gained the most while no sector index ended negatively. Pvt bank (+8.3%), Realty (+7.3%) and BANK (+6.4%) were the top gainers. Out of the NIFTY50 stocks, IndusInd bank (+46.0%), L&T (+10.0%) and Bajaj Finance (+9.3%) rallied the most, while GAIL (-3.3%), HCL Tech (-2.6%) and Sun Pharma (-2.5%) were the worst performers for the day.

Edited excerpts of an interview with Mr Ramesh Iyer, Vice Chairman & Managing Director of Mahindra & Mahindra Financial Services Ltd; dated 25th March 2020. The interview aired on CNBC-TV18.

  • Original equipment manufacturers (OEMs) have shut down production due to COVID-19, which obviously have an impact on vehicle financiers.
  • For OEMs at the beginning of 4Q FY20, the volumes started to shrink because everybody was preparing for BS-VI transition and therefore the inventory levels started to come down. Now with the COVID-19 scare – even the little possible sales that were likely to happen have come to an end, according to him.
  • He added the month of January-February was average; March has been absolute no-number kind of a month, so he thinks that it would be a low single-digit growth in loan book or for some it may not even be that.
  • The Company has told the RBI about consumers asking them for a moratorium and has requested RBI to provide the same.
  • They have also told RBI that these are the times where maybe the non-performing assets (NPAs) norms itself will have to be rewritten to say it is not 90-days delinquent but 180-days kind of a delinquent and it is more to protect the good customers who have been paying so far.
  • There is uncertainty about tomorrow. So people had started becoming cautious but even more important is that the overall activities have started to reduce and therefore people’s earnings will start to reduce but these are times where instead of worrying about what is going to happen to the growth and things like that – the Company will be looking at ‘how do they help out the consumers’.
  • The current situation is still not as impactful in the rural market as seen in urban according to him. People will have to figure out after things get normal. They will start relooking at what else to do, how else to do. So the real impact will be known only three months down the line.
  • If consumers need some kind of temporary short-term loan after things get to some normal then the Company will look at what could be that short-term small-ticket loans to the existing consumers whom they may want to support and partner them to come out of this situation as things start to improve.

Consensus Estimate: (Source: market screener, investing.com websites)

  • The closing price of M&M Financial Services Ltd was Rs 169/- as of 26-March-2020. It traded at 0.9x / 0.8x/ 0.7x the consensus book value estimate of Rs 190/ 211/ 238 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of Rs 394/- implies a PB multiple of 1.7x on the FY22E book value of Rs 238/-

Improved activity post the extended rains is leading to improvement in repayments.

Update on the Indian Equity Market:

On Wednesday, NIFTY closed -0.2% lower. The NIFTY was dragged down by INDUSINDBK (-5.6%), WIPRO (-3.5%) and SBIN (-1.2%). The top performing NIFTY stocks were YESBANK (+3.5%), HEROMOTOCO (+2.5%) and TATAMOTORS (+ 2.0%). The worst performing sectors were NIFTY PVT BANK (-0.9%), NIFTY BANK (-0.8%) and NIFTY IT (-0.1%). Sectors that performed well included NIFTY REALTY (+1.3%), NIFTY AUTO (+1.2%) and NIFTY MEDIA (+0.8%).

Improved activity post the extended rains is leading to improvement in repayments.

Excerpts from an interview with Mr Umesh Revankar, MD – Shriram Transport Finance Co. The interview aired on CNBC-TV18 on 13th January 2020.

  • Shriram Transport (SRTRANSFIN) has raised $ 500 mn through an overseas bond issue. The issue was oversubscribed with a demand of $ 2.2 bn.
  • The issue happened at a coupon of 5.10%. The company’s first US $ bond in April 2019 was at a coupon of 5.92% and the subsequent issue was at a coupon of 5.32%. Over the period, the cost of borrowing is coming down. The all-in, post hedging cost of the current issue is a little less than 10%.
  • The rationale behind borrowing in the offshore market is the diversification of sources of funds. The all-in cost of domestic funds currently is around 9.25% to 9.50%. Offshore cost is 50-60 bps higher as of now.  As STF goes ahead, the cost of borrowing offshore is coming down. The company’s bonds are trading lower than 5% in the market.
  • Mr Revankar believes there will be some revival in demand, especially after the steep drop in MHCV. LCV segment is doing well. Even though there is a YoY drop, last year was the peak for LCVs, against that 15% drop is still good.
  • The inventory levels with manufacturers is coming down. As inventories come down, discounts will come down. In an increasing discount scenario, people tend to wait for further discounts. CVs are earning assets. Customers look at a resale price as it is not personal consumption. When discounts start to come down, there will be more comfort in buying as the value to the asset will be established. Because of these reasons, Mr Revankar expects pre-buying to happen before the BS-VI transition.
  • Shriram Transport is expected to have AUM growth of 8-9% for FY20. Earlier, the management was aiming for double-digit growth. However, 1HFY20 was conservative in terms of lending. The company reduced LTV, controlled lending, focused on only used vehicles, and did not lend much for new vehicles. Mr. Revankar expects that confidence should come back in 2HFY20 and FY20 should see AUM growth.
  • After the extended rainfall, mining and infra activities have finally started. That’s why cement and steel prices are also moving upward. Infra and mining will give some activity for transportation and general business. There is a definite improvement in repayments.
  • On the asset quality front, Shriram Transport disruption in 2QFY20 caused by extended rains. The impact has been arrested in 3QFY20. The asset quality should definitely improve from 4QFY20.
  • Shriram Transport’s lending is to individual operators and their cash flows are not very steady. The company is very patient with customers so there will be some asset quality movement. But the management is not much alarmed by such moves.

Consensus Estimate (Source: market screener and investing.com website)

  • The closing price of SRTRANSFIN was ₹ 1,097/- as of 15-January-2020. It traded at 1.4x / 1.2x / 1.0x the consensus Book Value for FY20E / 21E / 22E of ₹ 807/ 933/ 1075 respectively.
  • Consensus target price of ₹ 1,316/- implies a Price to Book multiple of 1.2x on FY22E Book Value of ₹ 1075/-.

Disbursement growth is not a priority in current market conditions- MD, Sundaram Finance.

Update on the Indian Equity Market:

On Monday, NIFTY took a hit and declined 1.9% due to escalation in US-Iran tensions. India is highly dependent on crude oil imports and the market is worried about a rise in crude oil prices and the resultant rise in inflation. Among the sectoral indices, the worst hit were NIFTY PSU BANKS (-4.3%), NIFTY METAL (-2.9%) and NIFTY BANK (-2.6%). No sector closed in the green. Among NIFTY50 stocks, SBIN (-4.6%), BAJFINANCE (-4.5%) and VEDL (-4.5%) were the worst hit. TITAN (+1.5%), WIPRO (+0.3%) and DRREDDY (0.04%) were among the very few gainers.

Disbursement growth is not a priority in current market conditions- MD, Sundaram Finance.

Excerpts from an interview with Mr TT Srinivasaraghavan – MD, Sundaram Finance. The interview aired on CNBC TV18 on 2nd January 2020.

  • Being a vehicle finance lender, Sundaram Finance has been impacted due to the demand slowdown across the auto sector.
  • Mr Srinivasaraghavan says there is no underlying reason for the demand situation to change as far as CVs, especially MHCVs, are concerned. He does not see any green shoots as of now. Some green shoots might be visible 3QFY21 onwards.
  • There is little bit of replacement demand for buses by municipalities and state governments. Not so much improvement on the Infrastructure front.
  • Infrastructure was the engine that drove the economy for the last 5 years and everyone had hoped that would continue. Expected action on the infrastructure front by the government hasn’t happened. If the FM’s recent announcement of Rs 102 tn infrastructure projects kicks off, then there could be some serious projects coming up that would trigger buying.
  • Sundaram Finance’s disbursements in 1HFY20 were 1.5% lower YoY compared to 15.5% growth YoY in 1HFY19.  Mr Srinivasaraghavan says that disbursement growth is not in the top 3 priorities in current conditions. With PVs down 18% YoY, MHCVs down 52% YoY and overall CVs down 22% YoY, now is not the time to chase growth. Maintaining robust portfolio quality and maintaining healthy margins are the priorities. These are turbulent times and one must fasten their seatbelts and hang on.
  • Sundaram Finance has seen a significant lowering in the cost of funds compared to a year-ago period.  Their market share has also improved, partly due to liquidity issues faced by some players. But even though the market share has improved, the market size itself has shrunk.
  • Sundaram Finance’s asset quality has deteriorated from GNPAs of 1.3% at the end of 4QFY19 to 2.2% as of the end of 2QFY20. Mr Srinivasaraghavan does not think the asset quality will improve dramatically in the near term although it will go back to more reasonable levels eventually.
  • NPA is a fair reflection of the stress the customers are facing. Transport operators are facing enormous stress due to a combination of overall economic factors such as projects not happening, terrible freight rates, state government pulling the plug on already running or awarded projects.  The operators will need 6-9 months for them to get out of this pressure on cash flows. The best that the company can do is to nurse the customers through this difficult period even if the asset quality is what it is.
  • Sundaram Finance has seen a small element of pre-buying from some larger customers in the last weeks of December. Mr Srinivasaraghavan’s suspicion is that they are coming up for replacement in the next 3-6 months and that’s why they are buying now when they can better negotiate the BS-IV prices. Also perhaps there are specific sectors where customers are seeing some green shoot. But green shoots all around is not the case yet.

Consensus Estimate (Source: market screener and investing.com website)

  • The closing price of SUNDARMFIN was ₹ 1,611/- as of 06-January-2020. It traded at 3.1x / 2.8x / 2.6x the consensus Book Value for FY20E / 21E / 22E of ₹ 514/ 582/ 623 respectively.
  • Consensus target price of ₹ 1,826/- implies a Price to Book multiple of 2.9x on FY22E Book Value of ₹ 623/-.