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* NBFCs are expected to report strong disbursements for the quarter, based on Q3 being a seasonally good quarter as well as on our interaction with the management and business updates from NBFCs. Considering that most NBFCs under our coverage have entered the cycle with bank borrowings linked to MCLR with annual resets, we expect that CoFs will start reflecting the 225-bps hike in repo rates thus far, along with the ~120bps of MCLR rate hikes undertaken by banks. While HFCs have increased lending rates, broadly in line with policy hikes, vehicle financiers have absorbed around 20bps of cost increases in favor of continued strong growth. Overall, we expect margin compression of around 23bps across our coverage universe, with lending rate hikes yet to catch up.

* Vehicle Finance companies: MMFS, in its business update, reported a strong disbursement growth of 22.2% QoQ/79.9% YoY and of 4.3% QoQ/20.4% YoY for its business assets. For Chola, we expect disbursement growth of 7.4% QoQ/50.6% YoY, driven by healthy sequential growth in the vehicle-finance and new-business segments of consumer and SME financing. For SHFL, we expect disbursement growth of 4.2% QoQ/16.3% YoY, driven by core-vehicle financing along with the SME/2W segments.

* Housing Finance companies: For LICHF, we expect disbursement growth of 21.1% QoQ/14.4% YoY, driven by pickup in project loans, as guided by Management in previous interactions. As a result, we expect AUM growth of 3.7% QoQ/11.8% YoY to Rs2.72Tn, with share of Individual housing loans at 95.2% (Q2: 95.5%). For LTFH, we expect disbursement growth of 21.1% QoQ/34.9% YoY, driven by higher rural, consumer, housing/LAP and infra-related disbursements. Accelerated repayments in the wholesale segment are expected to result in overall AUM growth of 1% QoQ/6.4% YoY. For Piramal Enterprises (PIEL), we expect organic retail disbursements to grow by 9.4% QoQ, resulting in AUM growth of 2.1% QoQ/-1% YoY due to run-down of the wholesale book. This is ahead of earlier Management guidance of 5-7x Sep-21 disbursements by Q3FY23.

* Net Interest Margins: We expect NBFCs in our coverage universe to report a ~23bps QoQ decline in NIMs on the back of rise in CoFs triggered by annual MCLR resets and rising deposit rates (Exhibits 10 & 11), coupled with lag in transmission of yield hikes . Due to the fixed nature of their portfolio, NIMs for Chola and MMFS are expected to moderate by ~20bps. For Poonawalla Fincorp, we expect CoFs to remain largely contained which, coupled with rise in yields, is likely to result in NIMs increasing by 11bps QoQ. For LTFH, we expect the rise in CoFs to be offset by the yield hike, resulting in flat NIMs sequentially. For PIEL, NIMs are not comparable on a QoQ basis, given the impact of interest reversals from slippages in the wholesale book in Q2. LICHF hiked its PLR by 175bps this fiscal; we expect NIMs to rise 54bps QoQ, reflecting the adverse impact of slippages in Q2.

* Operating expenses: We expect operating expenses to moderate after a sustained period of high opex. For LTFH, however, the increasing retailization of the portfolio is expected to result in opex-to-AUM rising by 19bps QoQ. SHFL is expected to witness a 43bps sequential rise in opex-to-AUM due to merger-related expenses, incl. stamp duty,

* Asset quality: With implementation of the RBI IRACP norms from Q3, we expect sequential improvement in asset quality across NBFCs, on the back of improving business conditions. We expect higher credit costs for LTFH due to application of one-time gain (~26bn pre-tax), from sale of MF business (L&T Investment Managers) as provisions and sharply lower credit costs for PIEL, reflecting significantly-higher credit costs in Q2 due to slippages. Excl. LTFH and PIEL, we expect credit costs to decline by 6bps QoQ for our coverage companies.

* Stock-price performance: Since the beginning of the RBI rate-hike cycle from 4-May2022, MMFS and HDFC have outperformed the financial indices, while CIFC and BAF have underperformed by a wide margin.

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