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Awaiting growth amid an improving liquidity scenario
* Growth trend subdued amid sluggish demand; money supply trends improving: NBFCs under our coverage universe have witnessed stagnant AUM growth of ~12.6% yoy (+2.5% qoq) amid a weak domestic economy. Excluding Bajaj Finance, the growth number would have been further feeble. Domestic infrastructure and construction activities remained indolent; however, agri-activities have seen some momentum, aided by better water availability. Money supply for the sector witnessed some improvement with NBFCs continuing to diversify their borrowing sources toward international and retail markets instead of the traditional capital markets. In addition, securitization markets have been buzzing for a while. PAT during the quarter grew 17.3% yoy (13.5% qoq), and was impacted by subdued margins and elevated credit costs but was supported by lower taxes.
* Margins subjacent; asset-quality risk imperative: NBFCs are switching from capital market funding to longer-tenure borrowings, a relatively stable source of funding with lower volatility. With the softening in monetary policy by the Reserve Bank, along with various measures to improve systemic liquidity, we expect overall cost of funds for NBFCs to normalize gradually, resulting in an improvement in margin profile. Asset-quality trends are expected to remain subdued amid weaker economic trends and rising risk from the developer portfolio. However, the risk of elevated defaults is subsiding with the improving economic scenario.
* HFCs continue to lose ground, SBI maintains top position among mortgage lenders: We have been highlighting our concerns about HFCs considering the competition intensity, sticky developer exposures and consistent liquidity crunch they are facing. With the recent shift in regulator from the NHB to the RBI, the arbitrage of being a pure HFC has been weakened with continued tightening of norms. The recent restructuring of developers has also not been given to HFCs, putting further pressure on them. An analysis of market share data revealed that the contribution of banks in mortgages have improved to ~59.3% in Dec’19 from 56% in March’19, with SBI maintaining the lead position with ~23.8% market share; HDFC is still holding the ground with a market share of ~17.2%.
* Economic recovery to be gradual; SHTF added as new preferred pick: Although we remain positive toward high-quality NBFCs with decent promoter backing and superior asset-liability management profiles, we also believe that demand recovery would be a gradual process. We prefer Bajaj Finance (Buy; TP: Rs4,900), HDFC Limited (Buy; TP: Rs2,846) and MMFS (Buy; TP: Rs394). We have upgraded SHTF to Buy with a TP of Rs1,459, factoring in the favorable risk-reward it offers.
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