* Weak growth momentum, however, optimism building up over festive demand: When the economy started opening up after the nationwide lockdown, NBFCs were hit by regional lockdowns, uncertainty of business resumption (due to unavailability of workers) and a highly ambiguous macro scenario. Our discussions with management and disclosures by leading NBFCs indicate that business activity in Sep’20 reaches at only 70- 75% of the last year’s level. Therefore, we expect a weak quarter from our NBFC universe, with flat AUM qoq but with visible signs of revival in disbursements.
* Margin trends to surprise positively in spite of heavy cash buffer: Considering the availability of liquidity in the system, we expect margin trends for most lenders to surprise positively in spite of excessive cash buffer maintained by most NBFCs in order to avoid any unusual circumstances. Few recent fund-raising transactions further reiterate our view on the margin surprise.
* Collection efficiency improving; moratorium unfolding key monitorable: With the moratorium ending in Aug’20, we believe that the asset quality pain and the extent of restructuring in NBFCs will be visible only in Q3. Managements have indicated a sharp revival in collection efficiency by Sep’20, however, we await management commentary on the sustainability of the same as we move to the ‘new normal’. We also expect another quarter of high credit costs on aggressive provisioning post fund-raises.
* HDFC, Chola to surprise positively; caution over LICHF/LTFH earnings: We expect HDFC Ltd. (Buy, TP of Rs2,000) to bounce back sharply due to good mortgage demand on the back of low interest rates, price cuts by developers and some stimulus (stamp duty cuts, etc.). We maintain our cautious stance over Bajaj Finance (Hold, TP of Rs2,950) due to the uncertainty around the unsecured portfolio. We expect muted numbers from LTFH/LICHF due to the elevated real estate portfolio. We expect positive surprises from MMFS/ Chola amid a strong revival in auto demand.
* Premium collections normalizing; share of private players declining: After witnessing sharp declines in overall premium collections during Q1FY21, the revival is expected by most insurers during Q2FY21. Though companies are now familiarizing themselves with the new normal, the traction in retail APE still remains weak. With a decline in demand for ULIPs, we also expect a decline in the share of private life insurance companies, the trend which is expected to normalize by Q4FY21E.
* Margin traction to see further improvement with rising traction in traditional plans: We expect the margin profile for most insurers to improve on a sequential basis with the rising traction in traditional plans over ULIPs due to the volatility in the markets. We also remain concerned about the recent fall in yields due to the consistent accommodative policy from the Reserve Bank as this decline would adversely impact guaranteed return products such as ‘Sanchay’, which had seen strong traction in the previous year.
* SBI Life/Max Life could surprise positively, HDFC Life may see some deterioration: Our analysis of monthly insurance data suggests relatively better growth momentum for SBI Life and Max Life, mainly supported by group insurance policies, whereas HDFC Life will continue to struggle on the growth front throughout the quarter.
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