NBFC

Enough liquidity in the system, but credit flow weak – Edelweiss

Update on Indian equity market:
Indian markets were muted today with Nifty closing the day 4 points higher at 11,935. Within the index, the gainers were led by IT biggies like HCLTECH (+4.1%), INFY (+2.5%) and KOTAKBANK (+2.2%) whereas CIPLA (-3.6%), TITAN (-2.6%) and ADANIPORTS (-2.5%) were the laggards. Among the sectoral indices, only IT (+1.3%) and METAL (+0.4%) closed in green whereas PHARMA (-1.8%), PSU BANK (-1.5%), and PVT BANK (-0.9%) led the laggards.
Excerpts of an interview with Mr. Rashesh Shah, CEO, Edelweiss Financial Services Ltd. (Edelweiss) published on CNBC-TV18 dated 12th October 2020:
50% of the loan book was under moratorium when it was announced by the Government. The same number has been under 20% by the end of September. 80% of customers are paying regularly. He said that the company has exposure to only semi-formal and formal sectors. The current Non-Performing Assets (NPA) is at 2-3%.
Commenting on the impact of the pandemic on the company’s books, he said that 2% should be the impact of credit cost purely because of COVID-19. He said that growth and profitability are the two challenges for the Non-Banking Financial Companies (NBFC) sector.
Liquidity in the system has improved in the last four-five months through various measures like TLTRO, partial credit guarantee schemes taken by the RBI. He said that liquidity is ample but the market is currently lacking the credit flow.
The bond market needs to get stabilized, long term credit flow needs to get started again for risk-taking, and the investment cycle to start again. The bond markets are currently dislocated and not yet back to 60-70% of the pre-ILFS levels.
The company has recently raised Rs 20,000 mn through the stake sale in the wealth management business, which is more than 5% of the company’s book size.
He said that the capital adequacy ratio for the housing finance business is at 25%, retail NBFC at 28%, and ECL finance at 21%.
Consensus Estimate: (Source: market screener & investing.com websites)
The closing price of Edelweiss was ₹ 60/- as of 13-Oct-2020. It traded at 0.9x/ 0.8x/ 0.8x the consensus Book Value estimate of ₹ 66/ 70/ 77 for FY21E/ FY22E/ FY23E respectively.
The consensus target price of ₹ 87/- implies a P/BV multiple of 1.1x on FY23E BV of ₹ 77.
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.”

All three companies- Finance, Life and General Insurance growing well– Bajaj Finserv

Update on the Indian Equity Market:

On Friday, Nifty closed with 2.3% gains at 11,050. Within NIFTY50, BAJAJFINSV (+6.6%), HCLTECH (+5.3%), and CIPLA (+5.1%) were the top gainers, while SBILIFE (-1.1%), BPCL (-0.9%), and UPL (-0.6%) were the only losing stocks. All the sectoral indices ended positive withIT (+3.5%), MEDIA (+3.4%), and AUTO (+3.4%) gaining the most.

All three companies- Finance, Life and General Insurance growing well– Bajaj Finserv

Excerpts of an interview with Mr. Sanjiv Bajaj, Chairman and MD, Bajaj Finserv (BAJAJFINSV), published on ETBFSI website dated 23rdSeptember 2020:
• Seven or eight years ago, the life insurance company (BALIC) and general insurance company (BAGIC) contributed to around 75-80% of Bajaj Finserv’s consolidated profits. BALIC contributed the largest, followed byBAGIC, and the least contribution came from Bajaj Finance.
• This has changed significantly since then. Today, Bajaj Finance is the largest contributor to consolidated profitability, followed by BAGIC and BALIC respectively.
• Bajaj Finserv owns 74% of the two insurance companies and a little under 52% of the finance company. So the proportion of the profit pick up ends up being different.
• All three engines are growing well so the shareholders get a diversified mix of profits from these companies.
• Companies under the Bajaj Finserv umbrella have become even more digital than before. Management has plans for the businesses to come out stronger, better and to provide a set of solutions for customers keeping in mind lessons learnt in this crisis is what the customers need.
1. Bajaj Allianz Life Insurance (BALIC)
• Life insurance is a peculiar business in the sense that when it is growing fast, the business burns more cash upfront in the form of commissions and expenses. But the company earns premium over a period of time and makes profits in later years. On the other hand, through slow growth years, the opposite happens and the profit goes up.
• Post the difficult lockdown phase, BALIC’s premium collections have come back to 80-85% of pre-COVID levels.
• The two insurance businesses are distributed very well through the country. As a result the recovery is quite good because recovery outside of the top 10, 20 cities has been very strong.
2. Bajaj Allianz General Insurance (BAGIC)
• Bajaj’s market share within general insurance companies is between 6.5% and 7%. Bajaj runs a diversified set of business lines, and most of these lines have market shares which are more or less around the 6.5%-7%`range.
• The market share also varies year on year based on changing competition and market opportunities.
• Bajaj may not be the cheapest policy issuer but is quick, fair, and transparent not only in policy issuances but also in claim handling.
• In the case of crop insurance, it is about 6.5-7% of Bajaj’s mix of the overall industry’s share. There are two main seasons -kharif and rabi –and the share of this business line in Bajaj’s business depends on what the dynamic is in that season. But it normally evens out over a year.
• In terms of uptick in motor insurance, the picture is still not very clear. There is growth due to pent-up demand and further growth is expected due to the upcoming festive season. But what will happen post that towards end of FY21E is unclear.
• The demand is still interwoven with the impact of the pandemic on local lives. Bajaj saw good growth in June. But July and part of August were terrible because of local lockdowns.
3. Bajaj Finance
• Due to the local lockdowns in the last few months, the business in top 20 cities got severely impacted.
• Bajaj Finance got impacted more compared to BAGIC and BALIC as it has a large percentage of business coming from the top 20 cities. But things have been getting better from August.
• Over two-thirds of the borrowers, who took the moratorium, had never bounced with Bajaj Finance earlier. That means they were conserving liquidity.
• Almost 30% of the book took a moratorium in the first couple of months. It came down to the low teens in the last two months. As people got more confident and as the cities and businesses started opening up, they started paying as well and that is a very good sign.
• Even though things are moving in the right direction, the situation is still unpredictable. Bajaj Finance continues to be extra conservative, has stocked up on liquidity and continues to make additional provisions.
• Bajaj Finance also remains conservative in incremental lending and will go back to growth when things start to improve.

Consensus Estimate (Source: market screener and investing.com websites)
• The closing price of BAJAJFINSV was ₹ 5,784/- as of 25-September-2020. It traded at 2.6x/ 2.3x/ 2.0x the consensus BVPS estimate of ₹ 2,188/2,478/ 2,873 for FY21E/ FY22E/ FY23E respectively.
• The consensus target price of ₹ 7,248/- implies a PB multiple of 2.5x on FY23E BVPS of ₹ 2,873/-.

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.”

Expect 90% collection efficiency in September – Shriram Transport Finance

Update on Indian equity market:
Markets continued to fall further on Tuesday after a sharp selloff on Monday as Nifty closed 99 points lower at 11,152. Among the stocks, HCLTECH (+2.3%), TCS (+2.2%) and GRASIM (+1.8%) were the top-performing stocks while ZEEL (-6.6%), ADANIPORTS (-4.8%), and GAIL (-4.5%) were the laggards. Within the sectoral indices, only IT (+1.2%) and PHARMA (+1.0%) were able to close the day in green whereas MEDIA (-2.4%), AUTO (-1.8%), and REALTY (-1.5%) were the sectors that bled the most.
Excerpts of an interview with Mr. Umesh Revankar, Managing Director & CEO, Shriram Transport Finance (Shriram) aired on CNBC TV18 dated 21st September 2020:
September is the first month without a loan moratorium. Since there is no moratorium, the collection has to be really good. In addition, most of the locations under lockdown have been opened up. The containment zones are the problem areas.
In May, 51% of the company’s borrowers made partial or full payment, up from 24% in the month of April. It increased to 71% in June while it remained flat in the months of July and August. About 73% of clients made payments in August. The company is expecting a 90% collection efficiency in the month of September. He said that the company is able to meet customers physically and they are willing to pay. They have observed delays in payments by very few customers.
He said that the disbursements are also picking up. The disbursements in the month of August were 50% of last year’s levels which has increased to 75% in September. The company expects to reach 90-100% of the monthly run rate in October- November period.
The business has been picked up in the second half of August in semi-urban and rural areas. He said that urban areas are mostly seeing e-commerce activity leading to some demand.
The company expects the business to be normal and to pre-lockdown levels by December as their customer segment is mostly owner-operator of the vehicle and less dependent on outside driver/ helper.
The festival period in October- November is likely to be good for the business. Some sectors like travel & tourism will take a little more time to recover. He said that the demand in the rural market has been really good and the NBFC should be able to improve business there with better penetration.
Consensus Estimate: (Source: market screener & investing India website)
The closing price of Shriram was ₹ 642/- as of 22-Sept-2020. It traded at 0.8x/ 0.7x/ 0.6x the consensus BV estimate of ₹ 837/ 932/ 1,036 for FY21E/ FY22E/ FY23E respectively.
The consensus target price of ₹ 884/- implies a P/BV multiple of 0.9x on FY23E BV of ₹ 1,036/-.
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.”

Industry to see a spike in NPA’s in Q3 – Sundaram Finance

Update on the Indian Equity Market:
On Monday Nifty closed 0.2% lower at 11,440. Among the sectoral indices Bank (-1.8%), PVT Bank (-1.5%), and FIN Services (-1.7%) closed lower. IT (+4.4%), Realty (+3.7%), and Media (+1.5%) closed higher. Bharti Airtel (-3.8%), Bajaj Finance (-3.2%), and BPCL (-3.2%) closed on a Negative note. HCL Tech (+10.6%), TCS (+4.9%), and Wipro (+4.5%) were among the top gainers.

Excerpts from an interview of Mr. TT Srinivasaraghavan, MD, Sundaram Finance with ET NOW dated 14th September 2020:

• Mr Srinivasaraghavan said the situation is better and the negativism has started to lift.
• The company continues to focus on prudence and in terms of protecting asset quality.
• The moratorium has ended 10 days ago and now the company is moving into real world.
• He says, the next 4 months ending December are going to be curtail from an asset quality portfolio preservation perspective.
• The growth is coming back is selected few segments, the disbursals in August 20 were 70% of August 19 and September20 is looking similar side or little more.
• The rural and infrastructure segments are showing signs of growth.
• For Commercial Vehicles the first 5 months was a no show and an estimate of the company says that some growth will be seen in Q4FY21E.
• Given current situation he said the current portfolio will be skewed away from Medium and Heavy commercial vehicles.
• The company is well capitalized and there is no need to raise capital.
• On the NPA front, he said that it’s too early to spot a trend but people have started to repay and collections have started to flow in.
• He says, In Q3 the industry will see a spike in NPA’s.
Consensus Estimate: (Source: market screener and Investing.com websites)
• The closing price of Sundaram Finance was ₹ 1,335/- as of 14-September-2020. It traded at 28x/ 19x/ 21x the consensus Earnings per share estimate of ₹ 47.8/70.5/63.5 for FY21E/ FY22E/ FY23E respectively.

• The consensus average target price for Sundaram Finance is ₹ 1,423/- which implies a PE multiple of 22x on FY23E EPS of ₹63.5/-.
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.”

RBI should allow one-time restructuring rather than extending moratorium – Bajaj Finserv

Update on the Indian Equity Market:

On Thursday, Nifty ended 0.9%, lower than the previous close at 11,254. The top gainers for Nifty 50 were Dr Reddy (+4.6%), Sun Pharma (+3.7%), and Wipro (+2.5%) while the losing stocks were BPCL (-7.9%), IndusInd Bank (-5.4%), and IOC (-4.0%). The sectoral gainers for the day were Pharma (+3.1%) and IT (+0.7%) while the losers were Media (-2.3%), Pvt Bank (-2.0%) and PSU Bank (-1.9%).

Edited excerpts of an interview with Mr Sanjiv Bajaj, MD, Bajaj Finserv; dated 29th July 2020 from CNBC TV18:

  • Mr Bajaj extended support to HDFC chief Mr Deepak Parekh’s view that the Reserve Bank of India should not extend the loan moratorium.
  • Bajaj Finserv has a total of 6 months available for moratorium by September, and as the economy has started picking up from last month at varying speeds because of local lockdowns creating issues. But it is picking up other than a few key sectors like hospitality, travel, entertainment which are facing very high challenges. But most others have started at least doing okay. So, at a time like this, Mr. Bajaj believes that it doesn’t make sense to extend a blanket moratorium.
  • Moratorium numbers have come down significantly in the month of June as compared to April and May-20 for many banks & NBFCs.
  • RBI should allow one-time restructuring rather than extending the moratorium. According to him, let lenders decide on the basis of each one’s own underlying cash flows, because eventually, it should be kept in mind that there is a cost to doing all this and somebody has bear that cost. A 6-month moratorium is long enough, beyond that will start creating a moral hazard that even reasonable quality borrowers will lose the habit of paying.
  • Bajaj Finserv sees Rs 6,300 crores of credit cost for FY21E.
  • The Company was fortunate enough to raise capital for Bajaj Finance last year. They are adequately capitalised with the Rs 8,500 crore raised last year. As the two insurance companies do not need it, Bajaj Finserv has a significant capital on the books from profits of earlier years.
  • The tier-I ratio is 23-24% which he thinks is a comfortable one.

Consensus Estimate: (Source: market screener website)

  • The closing price of Bajaj Finserv Ltd was ₹ 6,175/- as of 30-July-2020. It traded at 2.8x/2.5x/2.1x the consensus book value estimate of ₹ 2,188/2,478/2,873 for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 7,248/- implies a PB multiple of 2.5x on FY23E EPS of ₹ 2,873/-.

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.”

Gold loan is currently the easiest access to credit- IIFL Finance

Update on the Indian Equity Market:

 

On Wednesday, Nifty closed 0.9% lower at 11,203. Within NIFTY50, DRREDDY (+6.3%), TATASTEEL (+4.0%), and INDUSINDBK (+3.1%) were the top gainers, while RELIANCE (-3.9%), M&M (-2.7%) and HCLTECH (-2.5%) were the top losers. Among the sectoral indices, PHARMA (+3.1%), PSU BANK (+1.5%), andMETAL (+0.9%) gained the most.  AUTO (-1.2%), IT (-0.9%), and FIN SERVICE (-0.6%)made the most losses.

 

Gold loan is currently the easiest access to credit- IIFL Finance

 

Excerpts of an interview with Mr.Saurabh Kumar,Head- Gold Loans, IIFL Finance (IIFL)published on the Economic Times website dated 29thJuly2020:

  • In the last 1 year, gold prices have risen 50%. This is a big benefit for borrowers as they are able to borrow 50% more compared to what they could last year against the same amount of gold.
  • In the past month, there has been a 25-30% growth in gold loan business.
  • IIFL is now at pre-covid levels in terms of gold loan disbursements.
  • There is a lot of demand for gold loans from farmers and SMEs. There is a pickup in agricultural activities leading to capital requirement for farmers. As businesses try to unlock, they are also trying to bridge working capital gaps.
  • There is approximately 24,000 tonnes of gold in India and gold is saved for a rainy day. Out of the entire gold, only 5-6% is leveraged against gold loans. The current situation brought on by covid-19 is the kind of rainy day when people need to leverage gold to survive, or take control of opportunities in the current context. Thus the opportunity for gold loans is huge.
  • Primary customers of gold loans are farmers and SMEs across sectors. All of them need working capital at this point in time. Gold is the easiest access to credit currently. It requires minimal paperwork. A person can walk into an NBFC branch like IIFL and pledge theirjewelry and walk out with a loan in 30 minutes.
  • Gold loan is typically for a tenure of about six to nine months. Farmers and SME customers get flexibility to repay unlike overdraft products or a term loan where there is a fixed duration and there are prepayment charges, penalties etc.
  • Borrowers usually repay a gold loan by making a payment once in two/three months or the moment they have cash inflows. During March to May, IIFL had given moratorium to the customers which led to slower repayments. As businesses are unlocking, a lot of repayments are happening. Borrowers are opting out of moratorium and making payments. As the businesses start operating, IIFL Finance expects to see near normal levels in July and August.

Consensus Estimate: (Source: investing.com website)

  • The reported BVPS as of 1QFY21 was Rs 126.8/-
  • The closing price of IIFL was₹ 71.2 /- as of 29-July-2020 and was trading at 0.6x the 1QFY21 BVPS.
  • Consensus estimates are not available for IIFL.

 

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.”

 

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/-