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Recovery gathers momentum

Disbursement and collection efficiencies at pre-COVID levels

* Macro recovery, coupled with a stable liquidity scenario, is leading to a strong recovery in growth and collection efficiency. Across product segments, disbursements for 4QFY21 are likely to be at pre-COVID levels.

* Across product segments, there continues to be a MoM improvement in collection efficiency (CE). Companies are also witnessing movement to the lower DPD segment from the higher DPD segment, leading to a lower provisioning requirement. We continue to build in higher PCR/write-offs to clean the books. We expect credit cost to revert to normal levels over the next 1-2 quarters.

* Stable liquidity scenario, coupled with a lag in the impact of a fall in the marginal cost of funds, led to an improvement in spreads. Assignment-related transactions have also increased during 4QFY21 for PSL purposes. In a few cases (like HDFC, LTFH, MMFS, etc.), the capital raise will continue to help margins.

* Capital market players continued to witness strong traction led by a pick-up in transactions during 4QFY21. Equity and derivative trading volumes for the industry remained healthy despite changes in margin regulations. Within the wealth management space, inflows remain healthy.

* Over the past few months, steady improvement across all important parameters has been encouraging. We continue to favor players with strong balance sheets and those least impacted by the ensuing COVID-19 lockdown. Our top picks are HDFC, MUTH, CIFC, SHTF, and ISEC.

HFCs: Growth momentum picking up Home sales across geographies witnessed a sharp recovery in the past few months. Good schemes/discounts by builders, record low interest rates, and stamp duty cuts in certain states were the key drivers. The Home loan segment continues to witness heightened competitive intensity, especially from Banks. HDFC would see healthy Home loan growth (~12% YoY), while other large HFCs are likely to deliver muted growth. Most players, including PNBHOUSI, have nearly stopped fresh corporate sanctions and are undertaking ‘retailization of Balance Sheet’ as the primary business strategy now. The Affordable Housing segment is seeing strong traction, with growth at AAVAS and CANF expected to pick up further. The Retail lending segment remains resilient on the CE side. The non-Retail segment remains a key monitorable.

Vehicle Financiers – Healthy performance all around Auto sales remained healthy across most products. Tractors and PVs witnessed a healthy traction on the back of good monsoon expectations and pick-up in economic activity. 2W volumes were a bit tepid compared to expectations. Though M&HCV volumes have seen a QoQ recovery, sales remain much below pre-COVID levels. Used CV sales remain healthy on the back of unaffordability of new M&HCVs due to the recent price hikes and anticipation of a good monsoon. Disbursements of Vehicle Financiers under our coverage are likely to be divergent. CIFC and SHTF would deliver a YoY growth in disbursements, while that for MMFS would be lower due to higher risk aversion for products like HCV, SME and non-M&M Tractors. Margins could be a key positive surprise for all Vehicle Financiers given the sharp decline in incremental cost of funds in 4QFY21. On the asset quality front, CE has been on an uptrend. Also, restructuring has been minimal (less than 1-2% of loans).

Gold financiers – Moderation expected Gold prices have seen a 12-15% correction QoQ, which is likely to have an impact on disbursements and AUM growth. While we expect a decline in prices to be partially compensated by LTV and higher tonnage, AUM is still likely to decline QoQ. Growth is also likely to be impacted marginally due to higher LTV (90%) offered by Banks. With portfolio LTV ~65%, there is unlikely to be any asset quality risk. In the nonGold portfolio, MGFL witnessed a healthy performance in disbursements and asset quality in the Housing Finance segment. However, the MFI segment still faces some collection headwinds, but the disbursement momentum is picking up.

Wholesale lending still muted; diversified financiers better off

Pick up in macro-economic activity and stable liquidity scenario are leading to healthy growth in wholesale financiers. Companies are also focusing on certain retail products, which is leading to healthy growth. In the wholesale book, lenders are largely focusing on existing projects and are not looking much at new projects. Diversified financiers are better off. For BAF, we expect a growth uptick across product categories. Further decline in cost of funds and a reduction in excess liquidity on the books are likely to drive margins. LTFH and SCUF, too, are likely to see a sequential improvement in disbursements and asset quality.

Capital market players on a healthy growth trajectory

4QFY21 remained a healthy quarter in terms of cash and derivatives trading volumes despite a change in margin trading norms. While we expect a further moderation in market share for ISEC, revenues are likely to remain healthy due to strong cash delivery volumes. Recovery in client additions remains healthy for ISEC, backed by its open architecture and increasing share of non-ICICIBC channels. IIFL Wealth had a stable quarter in terms of flows. TBR revenue would remain lumpy as it is dependent on deal syndication opportunities. Traction in IIFL ONE and expense ratio reduction are key monitorables.

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