Improving trends; upbeat commentary
Collection efficiency at 70–80% levels; disbursements picking up
* We concluded our 16th Annual General Investor Conference, which saw participation from 15 NBFCs across various product segments.
* With improving macros across most business segments, there was increased optimism on collection efficiency (CE) as well as on growth across product segments. In retail lending, at least a 15–20% improvement was seen in collections over the last two months. Overall collection efficiency was at 70–75% for micro loans, at 80–90% for vehicle finance, and at 85–90% for affordable housing across financiers in Aug 2020. In terms of restructuring, most financiers await: a) trends in collections in September given the end of the moratorium and b) the Kamath committee recommendation.
* Vehicle finance – Tractors, 2Ws (two-wheelers), and SCVs (small commercial vehicles) have seen the fastest improvement. Tractors have benefited from a healthy crop harvest, and 2Ws have gained advantage owing to a growing preference for personal mobility due to the pandemic. SCVs have done well largely owing to last-mile connectivity. However, M&HCVs (medium and heavy commercial vehicles), especially linked to large fleet operators and the Commercial Passenger Vehicle segment, continue to face challenges.
* Housing finance – Given that no large-scale lay-offs or pay-cuts have been implemented by companies, the situation is manageable. In terms of real estate exposure restructuring, companies await final recommendations from the Kamath committee. Construction activity is back at normal levels in south India and 80%+ of pre-COVID levels in north India. Recovery in construction activity in Mumbai, India’s largest market, has been at just 50–60% levels as the fear of the pandemic is high in migrant labor.
* Diversified financiers – Infra finance has been largely stable given the operational nature of the assets. The SME and MSME segments have also seen a healthy improvement in disbursements and collections as businesses are operating at 65– 70% of earlier levels. Gold loan companies continue to be on a strong footing and have witnessed much stronger disbursements in 2Q v/s 1Q. In microfinance, while the overall collection efficiency is improving, geographic performances are mixed, with states such as Maharashtra (MH), Tamil Nadu (TN), West Bengal (WB), and Odisha (OD) seeing challenges. However, disbursements are yet to resume properly for most entities.
* All companies have ramped-up their collection infrastructure aggressively, and there are talks of the near-normalization of collection efficiency in most products by Diwali. While certain retail lending segments may require restructuring, this would be limited to less than 10% of the portfolio. In wholesale lending, certain real estate exposures, hospitality exposures, and toll road projects may require restructuring.
* Improving liquidity and a higher risk appetite on account of better collection performance have given companies the confidence to lift disbursements. Improvement in the Rural segment is a consensus view of most participants. Mass and affordable housing have been the key growth drivers for most housing financiers. While disbursements for vehicle financiers are likely to decline 40–50% YoY in FY21, AUM is likely to grow in the low single digits. Housing finance players are likely to witness normalization in disbursements by Nov–Dec’20, resulting in just 10–20% YoY decline in disbursements for the year.
* All the companies mentioned that the equity capital raise was only to reduce the overall leverage on the balance sheet. Otherwise, capital levels are comfortable for expected growth and any potential asset quality issues.
Vehicle finance – Significant improvement in collection efficiency
Since most vehicle financiers operate in rural and semi-urban locations, buoyancy has led to faster-than-expected recovery. This is attributable to the focus on partial collections, even from customers under moratorium, especially ‘SMA’ customers. 2Ws and tractors are the key products to have shown strong traction, with CE reaching almost pre-COVID levels. SCVs (last-mile connectivity) have also shown improvement. As most operate in essential commodities, the impact on customer cash flow has been minimal. Importantly, the Small Road Transport Operators (SRTO) and Driver-cum-Operator segments have been less impacted. This is attributed to large fleet operators with driver shortage problems outsourcing their contracts to these segments. Passenger commercial vehicles such as cab aggregators, tourist vehicles, and school bus operators are facing higher issues and may need restructuring. The M&HCV segment is under some amount of pressure, weighed by limited freight availability and higher diesel cost. However, the migration to BS6 (prices are 12–18% higher v/s BS4) has helped maintain used vehicle prices at firm levels. Companies expect disbursements to decline 40–50% YoY in FY21. However, AUM would be largely flattish or grow in the low single digits due to interest capitalization and a lower repayment rate on account of moratorium.
Housing finance – Construction activity picking up; clarity on restructuring post finalization of Kamath committee recommendations
In south India, construction activity is almost back at pre-COVID levels, while in north India, it is at 80% of earlier levels. Mumbai is a laggard, with activities still at just 60–70% of earlier levels. Likewise, sales have picked up to 50% of pre-COVID levels v/s ~30% earlier. This is driven by Affordable and Mass Housing, while the Luxury segment remains a concern. The recent cut in stamp duty in Maharashtra would aid marginally. Other states could also follow suit. While disbursements are at 60–70% of YoY levels, they are expected to reach 85–100% of prior-year levels in 2HFY21. 15–25% of retail customers have availed moratorium; however, most of them have done so largely to conserve cash. The availment of moratorium on account of job loss or pay cuts is not meaningful. One company mentioned that the maximum stress from the retail moratorium book would be 10–15%. With regard to the restructuring of corporate loans, companies await final guidelines from the Kamath committee.
Microfinance – 70%+ CE; higher stress in MH, TN, and east
India Based on MFIN’s directives, there were no collections from customers in the first phase of moratorium. However, by the end of the second phase, collection efficiency had reached 70–75%. Disbursements are still muted as companies are considering parameters such as a minimum of two EMI payments, zero dpd before moratorium, etc., before resuming disbursements. Geographic performances are mixed – TN, WB, OD, and MH have witnessed lower collections due to either prolonged lockdowns or political interference. On the other hand, Bihar, Uttar Pradesh (UP), and Karnataka (KTK) have posted strong collection performances.
Diversified financiers – Comfortable liquidity; growth to improve gradually; rural remains key growth driver
Most SMEs opted for moratorium to conserve cash. With the economy getting back on track, SMEs have witnessed two-thirds of the business returning. Additionally, they are benefiting from the recent GOI schemes. Infrastructure finance has been the least affected. With the Renewable Power sector being a key focus area, it had a ‘must-run’ status during the lockdown. Hence, exposures in this segment remain comfortable. Toll road projects are seeing healthy vehicle movement, with traffic back at 90% of pre-COVID levels v/s 30% in April. Annuity project payments by NHAI have been timely. Gold finance continues to see good traction with higher gold prices and increased volume demand. The recent regulations granting a 90% LTV cap for banks is unlikely to impact NBFCs meaningfully given that: a) banks cater to a different customer segment and b) NBFCs still have various other advantages, such as TAT, repayment convenience, etc.
Most companies well-placed on capital; cost-cutting under focus
The sector has witnessed a meaningful number of equity capital raises in the past two months. Most companies have raised money largely in order to reduce leverage rather than as ‘repair capital’. It is unlikely that companies would need further capital in the near-to-medium term as: a) asset quality performance has been better than initially expected and b) balance sheet growth is not likely to revert to preCOVID levels before 2HFY22. On the opex front, views were divergent. Most companies expect opex to revert to normal as the business picks up. However, some companies such as MMFS, MGFL, etc., have taken this opportunity to permanently reduce certain expense lines.
Valuation and view
Overall, management commentary was upbeat given the gradual unlocking of the economy, MoM improvement in collection efficiency, and buoyant rural demand. Furthermore, adequate liquidity and improving collections have led to higher confidence on growth. The festive season remains crucial for the growth momentum to continue. With a sharp fall in incremental cost of funds, players are likely to deliver stable to improving margins over the next four quarters. While CE is positive across the board, the tail risk-coupled restructuring associated with the same would be the key monitorable in the ensuing quarters. However, we do not foresee any meaningful rise in NPA immediately as most companies are focused on collections from SMA 1 and 2 accounts. We believe players with a strong parentage, a healthy balance sheet, and low asset quality risk are likely to outperform. HDFC is our top pick in the space.
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