Monday, 9 May 2016

Three NBFCs to bet on as CV sales recover

Piggy backing on a visible recovery in sales of commercial vehicles, Shriram Transport Finance, M&M Financial and Cholamandalam Finance emerge as favourites

With many quarters of earnings disappointment on account of weak net interest income (NII) growth or elevated non-performing assets (NPAs), stocks such as Shriram Transport, M&M Finance and Cholamandalam Finance have remained under pressure. But now with the better than average monsoon season forecast, sales of commercial vehicles (CVs) are showing steadfast signs of improvement. These stocks have gained 14-30% in the last month. Their March 2016 quarter (Q4 FY16) results too exceeded the Street’s expectations. This too fuelled their stock performance, regenerating interest in these stocks.

For instance, Shriram Transport, which is the market leader in CV lending segment, saw its NII for Q4FY16 expand to Rs 1,273 crore, up 34% year-on-year. However, higher provisioning (Rs 1,073 crore; up 33%) dented net profit to Rs 143 crore, which was down 55% year-on-year. But as this was due to consolidation of its commercial equipment business, analysts regard it as a one-off. In fact, the 23% year-on-year growth in assets under management or AUM (Rs 72,750 crore) and positive surprise from share of new CVs expanding from 8% a year-ago to 10% in Q4FY16 offset the decline in profit. Used vehicles business accounting for the rest of its business grew by 21% year-on-year. AUMs in FY17 are expected to grow by 15%, contingent to monsoon. Consequently, analysts at Jefferies have raised their earnings per share (EPS) target for FY17-18 by 100–200 basis points (bps) as Shriram Transport should benefit from strong CV credit demand and lower borrowing cost.  

Likewise, for M&M Financial Services, after a watered-down December'15 quarter, NII and net profit posted 16% and 12% year-on-year growth in Q4FY16, respectively. Elevated provisioning for bad loans which was the major pain point for many quarters showed remarkable improvement in Q4FY16 as provisioning declined by 23% year-on-year to Rs 116 crore in Q4’FY16. Also, with fairly high levels of repossession and collection efforts in place, analysts at Credit Suisse note that the provision coverage for M&M Financial remains intact at 62%. Though loans grew at 11% year-on-year (versus 18-20% for peers), with the asset quality improving, Credit Suisse has recently upgraded its EPS target for FY17 by 300 basis points to Rs 23.6.

In case of Chalamandalam Finance, too, Phillips Capital has increased its EPS estimate for FY17 by 350 basis points to Rs 48 on the back of strong NII, net profit and disbursements in the March 2016 quarter. While NII at Rs 600 crore grew by 33% year-on-year, net profit expanded by 42% to Rs 192 crore in Q4FY16. Vehicle finance (mainly CVs) account for 67% of Cholamandalam’s assets. In FY17, the company expects to maintain 20% growth in its advances, with higher focus on heavy commercial vehicles.

However, there is a word of caution for all NBFCs. While the asset quality may improve in FY17 with above-average monsoon, the crunching of provisioning norms from 120 and 150 days per dues (dps) to 90 dpd by FY17 (or FY18 in case of Shriram Transport) may put some stress on asset quality. But as this is a structural change, the Street is not too wary of it.

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